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Chapter 7. Variable Costing: A Tool for Management. The only costs of driving my car on a 200 mile trip today are $12 for gasoline. Variable Costing. Overview of Absorption and Variable Costing. Absorption Costing. Overview of Absorption and Variable Costing.
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Chapter7 Variable Costing:A Tool for Management
The only costs of driving my caron a 200 mile trip today are$12 for gasoline. VariableCosting Overview of Absorption and Variable Costing
AbsorptionCosting Overview of Absorption and Variable Costing No! You must consider these costs too!
Your wrong. I have the carpayment and theinsurance payment even ifI do not make the trip. VariableCosting Overview of Absorption and Variable Costing
Overview of Absorption and Variable Costing Who’s right? How should we treat the carpayment and the insurance?
Overview of Absorption and Variable Costing Let’s put some numbers to theissue and see if it willsharpen our understanding.
Unit Cost Computations Harvey Co. produces a single product with the following information available:
Unit Cost Computations Unit product cost is determined as follows: Selling and administrative expenses arealways treated as period expenses and deducted from revenue.
Income Comparison of Absorption and Variable Costing Harvey Co. had no beginning inventory, produced25,000 units and sold 20,000 units this year.
Income Comparison of Absorption and Variable Costing Harvey Co. had no beginning inventory, produced 25,000 units and sold 20,000 units this year.
Income Comparison of Absorption and Variable Costing Now let’s look at variable costing by Harvey Co. Variablecostsonly. All fixedmanufacturingoverhead isexpensed.
Income Comparison of Absorption and Variable Costing Let’s compare the methods.
Income Comparison of Absorption and Variable Costing Let’s compare the methods.
Reconciliation We can reconcile the difference betweenabsorption and variable income as follows: Fixed mfg. overhead $150,000 Units produced 25,000 = = $6.00 per unit
Extending the Example Let’s look at the second year of operations for Harvey Company.
Harvey Co. Year 2 In its second year of operations, Harvey Co. started with an inventory of 5,000 units, produced 25,000 units and sold 30,000 units.
Harvey Co. Year 2 Unit product cost is determined as follows: No change in Harvey’s cost structure.
Harvey Co. Year 2 Now let’s look at Harvey’s income statement assuming absorption costingis used.
Harvey Co. Year 2 These are the 25,000 units produced in the current period.
Harvey Co. Year 2 Next, we’ll look at Harvey’s income statement assuming is used. Variable costing
Harvey Co. Year 2 Variablecostsonly. All fixedmanufacturingoverhead isexpensed.
Advantages of the Contribution Approach Consistent with CVP analysis. Management finds it easy to understand. Net income is closerto net cash flow. Consistent with standardcosts and flexible budgeting. Advantages Easier to estimate profitabilityof products and segments. Impact of fixed costs on profits emphasized. Profit is not affected bychanges in inventories.
Fixed costs arenot really the costsof any particularproduct. All manufacturing costsmust be assigned toproducts to properlymatch revenues and costs. VariableCosting AbsorptionCosting Variable versus Absorption Costing
Depreciation, taxes, insurance and salariesare just as essential to products as variable costs. These are capacitycosts and will beincurred if nothingis produced. VariableCosting AbsorptionCosting Variable versus Absorption Costing
I guess we won’t be solving this controversy today! Variable versus Absorption Costing
Impact of JIT Inventory Methods In a JIT inventory system . . . Productiontends to equalsales . . . So, the difference between variable and absorption income tends to disappear.
