2. CHAPTER 5
Variable Costing

3. Full (Absorption) Costing
Inventory Costs Include:
Direct Material
Direct Labor
All Manufacturing Overhead
Variable and Fixed Cost elements are combined in Manufacturing Overhead
Required for GAAP

4. Full (Absorption) Costing

5. Variable Costing Inventory Includes:
Direct Material
Direct Labor
Variable Manufacturing Overhead
Enables organization to perform “what if” analysis
Not allowed for GAAP

6. Variable Costing

7. Differences Between Full and Variable Costing
Fixed Manufacturing Overhead
Under 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 approach
All costs are classified as fixed or variable costs

9. Variable Costing Income Statement Example

10. Full Costing Income Statement Example

11. Study Break #1
Which of the following complies with GAAP for external reporting purposes?
Absolute costing
Variable costing
Fixed costing
Full costing
Answer:
d. Full costing

12. Study Break #2
Which of the following lends itself well to internal decision making?
Absolute costing
Variable costing
Fixed costing
Full costing
Answer:
b. Variable costing

13. ClausenTube Example - Facts

14. ClausenTube Example Quantity Produced = Quantity Sold
Full Costing Income Statement

15. ClausenTube Example Quantity Produced = Quantity Sold
Variable Costing Income Statement

16. ClausenTube Example Quantity Produced > Quantity Sold
Full Costing Income Statement

17. ClausenTube Example Quantity Produced > Quantity Sold
Variable Costing Income Statement

18. Variable Costing for External Reporting

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 $4
Direct labor $3
Variable manufacturing overhead $2
Total variable manufacturing cost per unit $9
Fixed manufacturing overhead per year $168,000
Fixed selling and administrative costs $152,000

20. Example Exercise #1
During 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 Costing
Sales ($25 x 38,500) $962,500
Cost of Goods Sold ($13 x 38,500) $500,500
Gross Margin $462,000
Less Selling and Administrative Expense $152,000
Net Income $310,000

22. Example Exercise #2
During 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 Costing
Sales ($25 x 38,500) $962,500
Less Variable COGS ($9 x 38,500) $346,500
Contribution Margin $616,000
Less Fixed Costs:
Fixed Manufacturing Overhead $168,000
Fixed Selling and Administrative $152,000
Net Income $296,000

24. Impact of Method Selection on Income Statement
Units Produced = Units Sold
No difference in income
Units Produced > Units Sold
Full costing yields higher income
Units Produced < Units Sold
Variable costing yields higher income

25. Reducing Production

26. Impact of JIT on Income Effects
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.

27. Benefits of Variable Costing for Internal Reporting
Variable Costing Facilitates C-V-P Analysis
Separates fixed and variable costs
Variable Costing Limits Management of Earnings with Production Volume
Does 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 costing
Full costing yields a lower income than variable costing
Full costing and variable costing yield the same income
Variable costing yields a higher income than full costing
Answer:
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 costing
Full costing yields a lower income than variable costing
Full costing and variable costing yield the same income
Variable costing yields a lower income than full costing
Answer:
b. Full costing yields a lower income than variable costing

30. Impact of Changes in Sales

31. Copyright
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