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CHAPTER 5 Variable Costing
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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
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Full (Absorption) Costing
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Variable Costing Inventory Includes:
Direct Material Direct Labor Variable Manufacturing Overhead Enables organization to perform “what if” analysis Not allowed for GAAP
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Variable Costing
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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.
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Variable Costing Income Statement
Utilizes contribution margin approach All costs are classified as fixed or variable costs
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Variable Costing Income Statement Example
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Full Costing Income Statement Example
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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
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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
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ClausenTube Example - Facts
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ClausenTube Example Quantity Produced = Quantity Sold
Full Costing Income Statement
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ClausenTube Example Quantity Produced = Quantity Sold
Variable Costing Income Statement
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ClausenTube Example Quantity Produced > Quantity Sold
Full Costing Income Statement
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ClausenTube Example Quantity Produced > Quantity Sold
Variable Costing Income Statement
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Variable Costing for External Reporting
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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
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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?
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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
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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?
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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
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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
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Reducing Production
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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.
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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
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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
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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
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Impact of Changes in Sales
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