Presentation is loading. Please wait.

Presentation is loading. Please wait.

CHAPTER 5 Variable Costing. CHAPTER 5 Variable Costing.

Similar presentations


Presentation on theme: "CHAPTER 5 Variable Costing. CHAPTER 5 Variable Costing."— Presentation transcript:

1

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 © 2007 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.


Download ppt "CHAPTER 5 Variable Costing. CHAPTER 5 Variable Costing."

Similar presentations


Ads by Google