Chap 008 managerial accounting Hilton

8/9/2019 Chap 008 managerial accounting Hilton

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Copyright 2009 by The McGraw-Hill Companies, Inc. llMcGraw-Hill#Irwin

Absorption andVariable Costing

Chapter 8


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LearningObjective

1


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Absorption CostingAbsorption Costing

A system of accounting for costs in whichboth fixed and variable production costs

are considered product costs

!ixedCosts

VariableCosts

"roduct


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Variable CostingVariable Costing

A system of cost accounting that onlyassigns the variable cost of production to

products

!ixedCosts

VariableCosts

"roduct


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Absorption and Variable CostingAbsorption and Variable Costing

Absorption

Costing

Variable

Costing

Direct materials

Direct labor Product costsProduct costs Variable mfg. overhead

Fixed mfg. overhead

Period costs

Period costs Selling & Admin. exp.


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Absorption

Costing

Variable

Costing

Direct materials

Direct labor Product costsProduct costs Variable mfg. overhead

Fixed mfg. overhead

Period costs

Period costs Selling & Admin. exp.

#he difference between absorption and variablecosting is the treatment of fixed manufacturing overhead


7/48Copyright 2009 by The McGraw-Hill Companies, Inc. llMcGraw-Hill#Irwin

LearningObjective

$


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Lets put some numbers to an example andsee !hat !e can learn about the differencebet!een absorption and variable costing.



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%ellon Co produces a single productwith the following information available&

"umber of units produced annuall# $%'''

Variable costs per unit(Direct materials direct labor

and variable mfg. overhead )'*

Selling & administrative

expenses +*

Fixed costs per #ear(,fg. overhead )%''''*


expenses )'''''*



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'nit product cost is determined as follows&

Absorption

Costing

Variable

CostingDirect materials direct labor and

variable mfg. overhead )'* )'*

Fixed mfg. overhead

-*)%'''' $%''' units/ 0 1

2nit product cost )0* )'*


Selling and administrative expenses areal!a#s treated as period expenses and

deducted from revenue.


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(ncome )tatements(ncome )tatements

Absorption CostingSales -$'''' 3*+'/ 0'''''*

Less cost of goods sold(

4eginning inventor#

Add C56,

6oods available for sale

7nding inventor#

6ross marginLess selling & admin. exp.

Variable

Fixed

"et income

%ellon Co had no beginning inventory* produced $+*,,,units and sold $,*,,, units this year at -., each


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Absorption CostingSales -$'''' 3 *+'/ 0'''''*


4eginning inventor# 1*

Add C56, -$%''' 3 *)0/ 8'''''

6oods available for sale 8'''''*

7nding inventor# -%''' 3 *)0/ 9'''' +$''''

6ross margin $9''''*Less selling & admin. exp.

Variable

Fixed

"et income





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Absorption Costing

Sales -$'''' 3 *+'/ 0'''''*Less cost of goods sold(


Add C56, -$%''' 3 *)0/ 8'''''

6oods available for sale 8'''''*

7nding inventor# -%''' 3 *)0/ 9'''' +$''''

6ross margin $9''''*

Less selling & admin. exp.

Variable -$'''' 3 *+/ 0''''*

Fixed )''''' )0''''

"et income )$''''*






LearningObjective

.


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(ncome )tatements(ncome )tatements/ow let0s loo at variable costing by %ellon Co

Variable CostingSales -$'''' 3 *+'/ 0'''''*

Less variable expenses(


Add C56, -$%''' 3 *)'/ $%''''

6oods available for sale $%''''*

7nding inventor# -%''' 3 *)'/ %''''

Variable cost of goods sold $'''''*

Variable selling & administrative

expenses

Contribution margin

Less fixed expenses(

,anufacturing overhead

Selling & administrative expenses

"et income

:e exclude thefixed manufacturing

overhead.


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Variable CostingSales -$'''' 3 *+'/ 0'''''*

Less variable expenses(

4eginning inventor# 1*Add C56, -$%''' 3 *)'/ $%''''

6oods available for sale $%''''*

7nding inventor# -%''' 3 *)'/ %''''

Variable cost of goods sold $'''''*


expenses -$'''' 3 *+/ 0'''' $0''''Contribution margin +8''''*

Less fixed expenses(

,anufacturing overhead )%''''*

Selling & administrative expenses )''''' $%''''

"et income ;''''*


(ncome )tatements(ncome )tatements/ow let0s loo at variable costing by %ellon Co


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Cost of

6oods

Sold

7nding


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Comparing Absorption andComparing Absorption and


Let0s compare the methodsCost of

6oods

Sold

7nding


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LearningObjective

2


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3econciling (ncome 'nder3econciling (ncome 'nder


4e can reconcile the difference betweenabsorption and variable net income as follows&

Variable costing net income ;''''*Add( Fixed mfg. overhead costs

deferred in inventor#

-%''' units 3 *0 per unit/ +''''

Absorption costing net income )$''''*

Fixed mfg. overhead *)%''''2nits produced $%'''

> *0.'' per unit>



LearningObjective

+


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Cost5Volume5"rofit AnalysisCost5Volume5"rofit Analysis

6 CV" includes all fixed costs to computebreaeven

7 Variable costing and CV" are consistent as bothtreat fixed costs as a lump sum

6 Absorption costing defers fixed costs intoinventory

7Absorption costing is inconsistent with CV"because absorption costing treats fixed costs ona per unit basis


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Learning

Objective


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9xtending the 9xample9xtending the 9xample

Lets loo? at

the second#ear of

operationsfor ,ellonCompan#.


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%ellon Co :ear $%ellon Co :ear $

(n its second year of operations* %ellon Co started with aninventory of +*,,, units* produced $+*,,, units and sold

.,*,,, units at -., each

"umber of units produced annuall# $%'''

Variable costs per unit(Direct materials direct labor

and variable mfg. overhead )'*


expenses +*

Fixed costs per #ear(

,fg. overhead )%''''*


expenses )'''''*


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'nit product cost is determined as follows&

Absorption

Costing

Variable

CostingDirect materials direct labor

and variable mfg. overhead )'* )'*

Fixed mfg. overhead

-*)%'''' $%''' units/ 0 1

2nit product cost )0* )'*

=here has been nochange in ,ellons

cost structure.


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"o! lets loo? at ,ellons income statementassuming absorption costing is used.


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Absorption CostingSales -+'''' 3 *+'/ ;'''''*


4eg. inventor# -%''' x *)0/ 9''''*

Add C56, -$%''' 3 *)0/ 8'''''6oods available for sale 89''''*

7nding inventor# 1 89''''

6ross margin 8$''''*


Variable -+'''' 3 *+/ ;''''*Fixed )''''' );''''

"et income $+''''*

%ellon Co :ear $%ellon Co :ear $2nits in ending inventor# from the previous period.


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Absorption CostingSales -+'''' 3 *+'/ ;'''''*


4eg. inventor# -%''' x *)0/ 9''''*

Add C56, -$%''' 3 *)0/ 8'''''6oods available for sale 89''''*

7nding inventor# 1 89''''

6ross margin 8$''''*


Variable -+'''' 3 *+/ ;''''*Fixed )''''' );''''

"et income $+''''*


$%''' units produced in the current period.


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"ext !ell loo? at ,ellons income statementassuming variable costingvariable costing is used.


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Variable CostingSales -+'''' 3 *+'/ ;'''''*Less variable expenses(

4eg. inventor# -%''' 3 *)'/ %''''*

Add C56, -$%''' 3 *)'/ $%''''

6oods available for sale +'''''*

7nding inventor# 1

Variable cost of goods sold +'''''*


expenses -+'''' 3*+/ ;'''' +;''''

Contribution margin %)''''*

Less fixed expenses( ,anufacturing overhead )%''''*

Selling & administrative expenses )''''' $%''''

"et income $0''''*


7xcludes fixed manufacturing overhead.


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)ummary)ummary


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)ummary)ummary

For the t!o1#ear period total absorption

income and total variable income are the same.


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)ummary)ummary

Let0s see if we can get an overviewof what we have done

) C i f)ummary Comparison of


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)ummary Comparison of)ummary Comparison of

Absorption ;AC< and VariableAbsorption ;AC< and Variable

Costing ;VC


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Costing ;VC


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Costing ;VC


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Production versus

Sales

=otal


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Advantages

%anagement finds it%anagement finds it

easy to understandeasy to understandConsistent withConsistent with

CV" analysisCV" analysis

9mphasi=es contribution in9mphasi=es contribution in

short5run pricing decisionsshort5run pricing decisions

"rofit for period not"rofit for period notaffected by changesaffected by changes

in fixed mfg overheadin fixed mfg overhead

(mpact of fixed(mpact of fixedcosts on profitscosts on profitsemphasi=edemphasi=ed

9valuation of Variable Costing9valuation of Variable Costing


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AdvantagesConsistent with long5runConsistent with long5run

pricing decisions that mustpricing decisions that must

cover full costcover full cost

9xternal reporting9xternal reportingand income tax lawand income tax law

re>uire absorption costingre>uire absorption costing

9valuation of Absorption Costing9valuation of Absorption Costing

!ixed manufacturing overhead is!ixed manufacturing overhead istreated the same as the other producttreated the same as the other productcosts* direct material and direct laborcosts* direct material and direct labor


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Learning

Objective@


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Learning

Objective8


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9nd of Chapter 89nd of Chapter 8

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