1. INCOME EFFECTS OF ALTERNATIVE INVENTORY-COSTING METHODS

2. Variable Costing & Absorption Costing
A method of inventory costing in which all variable manufacturing costs are included as inventoriable costs
Absorption Costing
A method of inventory costing in which all variable manufacturing costs and all fixed manufacturing costs are included as inventoriable costs

3. Radius Company for 20_7
The budgeted number and actual number of units produced are equal (1,100,000 units).
The budgeted number and actual number of units sold are equal (1,000,000 units).
The budgeted and actual fixed costs are equal.
Work in process is minimal.
No beginning inventory on January 1, 20_7.
All variable costs are driven by an output-unit-related variables.

4. Radius Company for 20_7

5. Income Statement for the Radius Company(20_7)

6. Income Statement for the Radius Company(19_7)

7. Comparison of Standard Variable Costing and Standard Absorption Costing
The Stassen Company
Unit data
Beginning inventory
Production
Sales
Ending inventory
January 20_7
600
400
200
February 20_7
200
650
750
100
Selling Price $99
Standard variable manufacturing costs per unit $20
Standard variable marketing costs per unit $19
Standard fixed manufacturing costs per month $12,800
Standard fixed marketing costs per month $10,400
Budgeted denominator level of production per month output units

8. Income Statement for the Stassen Company(20_7)

9. Income Statement for the Stassen Company(19_7)

10. Explaining Differences in Operating Income
Absorption costing Variable costing Difference
Jan. 20_ $4, $ $3,200
Feb. 20_ $20, $21, $(1,600)
Formula 1
Absorption-costing
operating
income
Variable-costing
operating
income
Fixed manufacturing
costs in
ending inventory
Fixed manufacturing
costs in
beginning inventory - = -
January 20_ $4, $800 = (200$16) - (0 $16) = $3,200
February 20_ $20,200 - $21,800 = (100$16) - (200 $16) = -$1,600

11. Explaining Differences in Operating Income
ASSUMPTIONS
1. All manufacturing variances are written off as period costs
2. No change occurs in work in process inventory
3. No change occurs in the budgeted fixed manufacturing overhead rate between accounting periods
Formula 2
Absorption-costing
operating
income
Variable-costing
operating
income
Budget fixed
manufacturing
costs rate - -
Units
produced
Units
sold = 
January 20_ $4, $800 = ( )  $16 = $3,200
February 20_ $20,200 - $21,800 = ( )  $16 = -$1,600

12. Effect of Sales and Production on Operating Income

13. Comparative Income Effects of Variable Costing and Absorption Costing

14. Throughput Costing
Throughput costing (also called super-variable costing ) treats all costs except those related to variable direct materials as costs of the period in which they are incurred; only variable direct materials costs are inventoriable.

15. Capsule Comparison of Alternative Inventory-Costing Systems
Throughput costing
Variable costing
Absorption costing

16. Performance Measures and Absorption Costing
Undesirable Buildups of Inventories
Absorption costing enables managers to increase operating income in the short run by increasing the production schedule independent of customer demand for products
Proposals for Revising Performance Evaluation
1. Change the accounting system.
2. Change the time period used to evaluate performance.
3. Include nonfinancial as well as financial variables in the
measures used to evaluate performance.

17. Company Usage of Variable Costing
S U R V E Y S OF C O M P A N Y P R A C T I C E
Company Usage of Variable Costing
Variable costing
used
Absorption costing
Other
31% 65 4
48% 52
33% 67
31% 69
42% 58
52% 48
Prorate fixed MOH to inventory /cost of goods
sold at period end
Use variable costing to monthly costing, and
convert to absorption costing once a year
Use of variable costing and absorption costing
as dual systems
Treat fixed MOH as a period cost
Other
41% 11 23 25
39% 8 33 3 17
25% 4 31 35