7 Differences Between Full and Variable Costing Fixed Manufacturing OverheadUnder Full Costing, it is included in inventory and expensed when product is sold.Under Variable Costing, it is considered a period expense and expensed on the income statement in the period incurred.
8 Variable Costing Income Statement Utilizes contribution margin approachAll costs are classified as fixed or variable costs
19 Example Exercise Information Summit Manufacturing, Inc. produces snow shovels. The selling price per snow shovel is $25. Costs involved in production are:Direct material $4Direct labor $3Variable manufacturing overhead $2Total variable manufacturing cost per unit $9Fixed manufacturing overhead per year $168,000Fixed selling and administrative costs $152,000
20 Example Exercise #1During the year, Summit produces 42,000 snow shovels and sells 38,500 snow shovels. What is net income using full costing?
21 Example Exercise #1 Solution Net Income using Full CostingSales ($25 x 38,500) $962,500Cost of Goods Sold ($13 x 38,500) $500,500Gross Margin $462,000Less Selling and Administrative Expense $152,000Net Income $310,000
22 Example Exercise #2During the year, Summit produces 42,000 snow shovels and sells 38,500 snow shovels. What is net income using variable costing?
23 Example Exercise #2 Solution Net Income using Variable CostingSales ($25 x 38,500) $962,500Less Variable COGS ($9 x 38,500) $346,500Contribution Margin $616,000Less Fixed Costs:Fixed Manufacturing Overhead $168,000Fixed Selling and Administrative $152,000Net Income $296,000
24 Impact of Method Selection on Income Statement Units Produced = Units SoldNo difference in incomeUnits Produced > Units SoldFull costing yields higher incomeUnits Produced < Units SoldVariable costing yields higher income
26 Impact of JIT on Income Effects Companies using JIT typically have low levels of inventory.Units produced are approximately equal to units soldDifference between full and variable costing is likely to be very small.
27 Benefits of Variable Costing for Internal Reporting Variable Costing Facilitates C-V-P AnalysisSeparates fixed and variable costsVariable Costing Limits Management of Earnings with Production VolumeDoes not allow management to inflate earnings
28 Study Break #3 If units produced exceed units sold: Answer: Full costing yields a higher income than variable costingFull costing yields a lower income than variable costingFull costing and variable costing yield the same incomeVariable costing yields a higher income than full costingAnswer:a. Full costing yields a higher income than variable costing
29 Study Break #4 If units produced are less than units sold: Answer: Full costing yields a higher income than variable costingFull costing yields a lower income than variable costingFull costing and variable costing yield the same incomeVariable costing yields a lower income than full costingAnswer:b. Full costing yields a lower income than variable costing