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Variable Costing: A Tool for Management

Variable Costing: A Tool for Management

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Variable Costing: A Tool for Management

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  1. Variable Costing: ATool for Management Chapter Seven

  2. ProductCosts Direct Materials ProductCosts Direct Labor Variable Manufacturing Overhead Fixed Manufacturing Overhead PeriodCosts PeriodCosts Variable Selling and Administrative Expenses Fixed Selling and Administrative Expenses Overview of Absorptionand Variable Costing AbsorptionCosting VariableCosting

  3. Quick Check  Which method will produce the highest values for work in process and finished goods inventories? a. Absorption costing. b. Variable costing. c. They produce the same values for these inventories. d. It depends. . .

  4. Unit Cost Computations Harvey Company produces a single productwith the following information available:

  5. Unit Cost Computations Unit product cost is determined as follows: Selling and administrative expenses arealways treated asperiod expensesand deducted from revenue as incurred.

  6. Income Comparison ofAbsorption and Variable Costing Let’s assume the following additional information for Harvey Company. • 20,000 units were sold during the year at a price of $30 each. • There were no units in beginning inventory. Now, let’s compute net operatingincome using both absorptionand variable costing.

  7. Absorption Costing

  8. Variable Costing

  9. Let’s compare the methods. Income Comparison ofAbsorption and Variable Costing

  10. Fixed mfg. Overhead $150,000 Units produced 25,000 units = = $6.00 per unit Reconciliation We can reconcile the difference betweenabsorption and variable income as follows:

  11. Extended Comparison of Income Data Harvey Company Year Two

  12. Unit Cost Computations Since there was no change in the variable costsper unit, total fixed costs, or the number ofunits produced, the unit costs remain unchanged.

  13. These are the 25,000 units produced in the current period. Absorption Costing

  14. Variablemanufacturing costs only. All fixedmanufacturingoverhead isexpensed. Variable Costing

  15. Fixed mfg. Overhead $150,000 Units produced 25,000 units = = $6.00 per unit Reconciliation We can reconcile the difference betweenabsorption and variable income as follows:

  16. Income Comparison

  17. Summary