slide 5-2 chapter 5 variable costing slide 5-3 full (absorption) costing inventory costs include :...

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CHAPTER 5CHAPTER 5CHAPTER 5CHAPTER 5

Variable CostingVariable CostingVariable CostingVariable Costing

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Full (Absorption) CostingFull (Absorption) CostingFull (Absorption) CostingFull (Absorption) Costing

Inventory costs include: -direct materials used -direct labor incurred -both fixed & variable manufacturing

overhead

Required by GAAP for external reporting purposes

Learning objective 1: Explain the difference between full (absorption) and variable costing

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Which of the following complies with GAAP for external reporting purposes?

a. Absolute costingb. Variable costingc. Fixed costingd. Full costing

Answer:d. Full costing


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Full (Absorption) CostingFull (Absorption) CostingFull (Absorption) CostingFull (Absorption) Costing


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Inventory costs includes:-Direct materials used-Direct labor incurred-Variable manufacturing overhead

Fixed manufacturing overhead treated as a period cost

Helpful for internal decision making Not allowed for GAAP reporting


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Difference Between Full and Difference Between Full and Variable CostingVariable Costing

Difference Between Full and Difference Between Full and Variable CostingVariable Costing

Treatment of fixed manufacturing overhead

Under full costing, it is included in inventory and expensed when the product is sold

Under variable costing, it is considered a period cost and expensed in the period incurred.


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Variable Costing Income Variable Costing Income StatementStatement

Variable Costing Income Variable Costing Income StatementStatement

Utilizes the contribution margin approach- Contribution margin ratio = contribution

margin/sales

Can help in decision making- Contribution margin ratio x change in sales = change in contribution margin- Fixed costs stay the same when sales change

Learning objective 2: Prepare an income statement using variable costing.

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Which of the following provides information helpful to internal decision making?a. Absolute costingb. Variable costingc. Fixed costingd. Full costing

Answer:b. Variable costing


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Sales are $100,000 and contribution margin is $65,000

Calculate the contribution margin ratio:$65,000 / $100,000 = 0.65 or 65%

Calculate the change in contribution margin if sales change by $10,000

$10,000 X 0.65 = $6,500


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Variable Costing Income Variable Costing Income Statement ExampleStatement Example

Variable Costing Income Variable Costing Income Statement ExampleStatement Example


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Full Costing Income Statement Full Costing Income Statement ExampleExample

Full Costing Income Statement Full Costing Income Statement ExampleExample


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Example - Clausen Tube Example - Clausen Tube Example - Clausen Tube Example - Clausen Tube

Selling price $2,000

Variable costs (per unit):-Materials = $600/unit-Labor = $225/unit-Variable mfg. overhead = $75/unit-Variable selling expense = $40/unit

Fixed mfg. overhead = $1,200,000

Production = 5,000 units

Learning objective 3: Discuss the effect of production on full and variable costing income.

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Clausen Tube - Full Clausen Tube - Full Cost/UnitCost/Unit

Clausen Tube - Full Clausen Tube - Full Cost/UnitCost/Unit

Full cost/unit (5,000 units) is calculated as follows:


Total Material Costs

$600/unit

Total labor costs $225/unit

Total variable OH $75/unit

Fixed Overhead $1,200,000/5000 units

$240/unit

Full Cost/Unit = $1,140/unit

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Clausen Tube – Clausen Tube – Variable Cost/UnitVariable Cost/UnitClausen Tube – Clausen Tube –

Variable Cost/UnitVariable Cost/Unit

Variable unit cost is calculated as follows:

Unit materials cost = $600 Unit labor cost = $225 Unit variable overhead = $75 Variable cost per unit =

$600 + $225 + $75 = $900 per unit


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Clausen Tube – Income Clausen Tube – Income StatementStatement

Clausen Tube – Income Clausen Tube – Income StatementStatement

Selling price = $2,000/unit Full cost = $1,140/unit Variable cost = $900/unit Variable selling expense = $40/unit Fixed overhead = $1,200,000 Fixed selling expense = $100,000 Fixed administrative expense=

$500,000


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Clausen Tube – Income Clausen Tube – Income StatementsStatements


Production equals sales (5,000 units)

Sales 5,000 x $2,000 = 10,000,000 Cost of goods sold 5,000 x $1,140 = 5,700,000 Gross margin 4,300,000 Selling & Admin Expenses* 800,000 Net Income 3,500,000

Sales 5,000 x $2,000 = 10,000,000

Variable costs5,000 x $900 +(5,000 x $40)= 4,700,000

Contribution margin 5,300,000 Fixed costs** 1,800,000 Net Income 3,500,000

Full Cost

Variable Cost*100,000 + 500,000 + (5,000 x $40)

**1,200,000 + 100,000 + 500,000


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Production (5,000) is greater than sales (4,000)


Sales 4,000 x $2,000 = 8,000,000

Variable Costs4,000 x $900 + (4,000 x $40) = 3,760,000

Contribution margin 4,240,000 Fixed Costs** 1,800,000 Net Income 2,440,000

Full Cost

Variable Cost*100,000 + 500,000 + (4,000 x $40)

**1,200,000 + 100,000 + 500,000


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Production (5,000) less than sales (6,000)


Sales 6,000 X 2,000 = 12,000,000

Variable costs6,000 X 900 +(6,000 x$40) = 5,640,000

Contribution margin 6,360,000 Fixed costs** 1,800,000 Net Income 4,560,000

Full Cost

Variable Cost*100,000 + 500,000 + (6,000 x 40)

**1,200,000 + 100,000 + 500,000


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Variable Costing for External Variable Costing for External ReportingReporting

Variable Costing for External Variable Costing for External ReportingReporting


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Summit Manufacturing, Inc. produces snow shovels. The selling price is $25. Costs are:

Materials 4 Labor 3 Variable Overhead 2 Fixed Overhead 168,000 Variable Selling & Admin 1 Fixed Selling & Admin 152,000

Production is 42,000 snow shovels. Calculate full cost/unit.(4 x 42,000) + (3 x 42,000) + (2 x 42,000)+ 168,000) = 546,000 / 42,000 = $13/unit


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Materials 4 Labor 3 Variable Overhead 2 Fixed Overhead 168,000 Variable Selling & Admin 1 Fixed Selling & Admin 152,000

Production is 42,000 snow shovels. Calculate variable cost/unit.

(4 + 3 + 2) = 9 per unit


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Full Cost Unit Cost 13 Variable Unit Cost 9 Fixed Overhead 168,000 Variable Selling & Admin 1 Fixed Selling & Admin 152,000

Sales are 38,500 snow shovels. Calculate net income using full cost.

Sales 38,500 x $25 962,500 Cost of Goods Sold 38,500 x $13 500,500 Selling & Admin 152,000 + 38,500 x $1 190,500 Net Income 271,500


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Full Cost Unit Cost 13 Variable Unit Cost 9 Fixed Overhead 168,000 Variable Selling & Admin 1 Fixed Selling & Admin 152,000

Sales are 38,500 snow shovels. Calculate net income using variable cost.

Sales 38,500 X 25 962,500 Variable Cost of Sales 38,500 X 9 346,500 Variable Selling & Admin 152,000 + 38,500 X 1 38,500 Fixed Overhead 168,000 Fixed Selling and Admin 152,000 Net Income 257,500


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Impact of Method Selection on Impact of Method Selection on Income StatementIncome Statement

Impact of Method Selection on Impact of Method Selection on Income StatementIncome Statement

Units produced = units soldNo difference in net income

Units produced greater than units soldFull costing yields higher net income

Units Produced less than units soldVariable costing yields higher net income


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If units produced exceed units sold:

a. Full costing yields a higher income than variable costing

b. Full costing yields a lower income than variable costing

c. Full costing and variable costing yield the same income

d. Variable costing yields a higher income than full costing

Answer:a. Full costing yields a higher income

than variable costing


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If units produced are less than units sold:

a. Full costing yields a higher income than variable costing

b. Full costing yields a lower income than variable costing

c. Full costing and variable costing yield the same income

d. Variable costing yields a lower income than full costing

Answer:b. Full costing yields a lower income than

variable costing


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Reducing ProductionReducing ProductionReducing ProductionReducing Production


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Impact of JIT on IncomeImpact of JIT on IncomeImpact of JIT on IncomeImpact of JIT on Income

Companies using JIT typically have low levels of inventory

Units produced are approximately equal to units sold

Difference between full and variable costing is likely to be very small.

Learning objective 4: Explain the impact of JIT on the difference between full and variable costing income

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Benefits of Variable Costing Benefits of Variable Costing for Internal Reportingfor Internal Reporting


Variable costing facilitates cost-volume-profit (CVP) analysis-separates fixed and variable costs-easily calculate the change in

income when sales change

Learning objective 5: Discuss the benefits of variable costing for internal reporting purposes

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Variable costing limits management of earnings via production volume-Managers are often compensated

based on income in their division-Full costing produces higher income

when production is greater than sales

-Managers have an incentive to manage earnings under full costing


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Impact of Changes in SalesImpact of Changes in SalesImpact of Changes in SalesImpact of Changes in Sales


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slide 5-2 chapter 5 variable costing slide 5-3 full (absorption) costing inventory costs include :...

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