1. Managerial Accounting
Basic Variable
and Full Costing
Prepared by Diane Tanner
University of North Florida
Copyright ©2015. University of North Florida. All rights reserved.

2. Measuring Product Costs
Includes all costs necessary to get products ready to sell
Two methods to determine product costs
Full (absorption) costing
Required for GAAP reporting
Emphasizes the cost function
Variable costing
Used for internal decision making
Emphasizes cost behavior
Helps managers make product decisions as it is easy to predict how costs will behave in the future

3. Reporting Product Costs
Merchandising companies
Buy goods to sell
Product costs reported
Merchandise Inventory on the balance sheet
Cost of Goods Sold on the income statement
Manufacturing companies
Buy materials to produce products to sell
Raw Materials, Work in Process, Finished Goods on the balance sheet

4. Components of Product Costs
Inventoriable costs include
Direct materials
Direct labor
Variable manufacturing overhead costs
Fixed manufacturing overhead costs
Full Costing
Inventoriable costs include
Direct materials
Direct labor
Variable manufacturing overhead costs
Variable Costing

5. Two Forms of Income Statements
Full costing income statement
Costs are reported based on function
Product versus period
Gross margin is the amount available to cover operating expenses and to go towards profit.
Variable costing income statement
Costs are reported based on behavior
Variable versus fixed
Contribution margin is the amount available to cover fixed costs and to go towards profit.

6. Contribution Margin (in $)
GP Ratio vs. CM Ratio
Contribution Margin (in $)
Sales (in $)
Contribution
Margin Ratio =
Indicates the portion of every sales dollar available to cover fixed costs and to go towards profit
Interpretation
Gross Profit (in $)
Sales (in $)
Gross
Profit Ratio =
Indicates the portion of every sales dollar available to cover operating costs and to go towards profit
Interpretation

7. Expanded GAAP Income Statement
Sales
$100,000
Cost of goods sold:
Variable product costs
$22,000
Fixed product costs
11,000
Total cost of goods sold
33,000
Gross margin (gross profit)
67,000
Operating expenses:
Variable period costs
38,000
Fixed period costs
19,000
Total operating expenses
57,000
Net operating income
$10,000
$67,000
$100,000
Gross profit
Sales =
= 67.00%

8. Expanded Variable Costing Income Statement
Sales
$100,000
Variable costs:
Variable product costs
$22,000
Variable period costs
38,000
Total variable costs
60,000
Contribution margin
40,000
Fixed expenses:
Fixed product costs
11,000
Fixed period costs
19,000
Total fixed expenses
30,000
Net operating income
$10,000
$40,000
$100,000
Contribution Margin
Sales =
= 40.00%

9. The Contribution Approach
Consider the following information developed by the accountant at Element Skateboard Co:
For each additional skateboard sold, profit will increase by $200. Fixed costs in total do not change.
CMR: = $200/$500 = 40%
For each sales dollar generated by Element, profit will increase by $0.40. Fixed costs in total do not change.

10. The End