Managerial Accounting

Chapter 8

Absorption and Variable Costing

McGraw-Hill/Irwin

Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

Absorption and Variable Costing

Absorption Costing Direct materials Direct labor Variable mfg. overhead Fixed mfg. overhead Period costs Period costs Selling & Admin. exp. Variable Costing

Product costs

Product costs

The difference between absorption and variable costing is the treatment of fixed manufacturing overhead.

8-2

Absorption and Variable Costing

Mellon Co. produces a single product with the following information available:

Number of units produced annually Variable costs per unit: Direct materials, direct labor and variable mfg. overhead Selling & administrative expenses Fixed costs per year: Mfg. overhead Selling & administrative expenses 25,000

$ $

10 3

$ 150,000 $ 100,000

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Absorption and Variable Costing

Unit product cost is determined as follows:

Absorption Costing Direct materials, direct labor, and variable mfg. overhead Fixed mfg. overhead ($150,000 ÷ 25,000 units) Unit product cost $ 10 6 16 Variable Costing $ 10 10

$

$

Selling and administrative expenses are always treated as period expenses and deducted from revenue.

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Absorption Costing Income Statements

Mellon Co. had no beginning inventory, produced 25,000 units and sold 20,000 units this year at $30 each.

Absorption Costing

Sales (20,000 × $30) Less cost of goods sold: Beginning inventory $ Add COGM (25,000 × $16) 400,000 Goods available for sale $ 400,000 Ending inventory (5,000 × $16) 80,000 Gross margin Less selling & admin. exp. Variable (20,000 × $3) $ 60,000 Fixed 100,000 Net income $ 600,000

320,000 $ 280,000

160,000 $ 120,000

8-5

Variable Costing Income Statements

Now let’s look at variable costing by Mellon Co.

Variable Costing

Sales (20,000 × $30) Less variable expenses: Beginning inventory Add COGM (25,000 × $10) Goods available for sale Ending inventory (5,000 × $10)...