Managerial accounting 6e jams jambalvo chapter 05

Prepared by Debby Bloom-Hill
CMA, CFM


CHAPTER
CHAPTER 55

Variable Costing


Full
Full (Absorption)
(Absorption) Costing
Costing




Required by GAAP for external reporting purposes
Inventory costs include:



Direct materials used





Direct labor incurred





Generally variable

Generally variable

Manufacturing overhead



Includes both fixed and variable costs

Learning objective 1: Explain the difference between full (absorption) and variable costing,
Slide 5-3

and prepare an income statement using variable costing.


Variable
Variable Costing
Costing



Inventory costs includes:










Direct materials used
Direct labor incurred
Variable manufacturing overhead

Fixed manufacturing overhead treated as a period cost
Helpful for internal decision making
Not allowed for GAAP reporting

Learning objective 1: Explain the difference between full (absorption) and variable costing,
Slide 5-4

and prepare an income statement using variable costing.


Test Your Knowledge 1
Which of the following complies with GAAP for external reporting purposes?

a.
b.
c.
d.

Absolute costing
Variable costing

Fixed costing
Full costing

Answer:
d. Full costing, also known as absorption costing

Slide 5-5

Learning objective 1: Explain the difference between full (absorption) and variable costing,
and prepare an income statement using variable costing.


Full
Full (Absorption)
(Absorption) Costing
Costing

Learning objective 1: Explain the difference between full (absorption) and variable costing,
Slide 5-6

and prepare an income statement using variable costing.


Variable
Variable Costing
Costing

Learning objective 1: Explain the difference between full (absorption) and variable costing,
Slide 5-7

and prepare an income statement using variable costing.


Difference
Difference Between
Between Full
Full and
and Variable
Variable Costing
Costing



The only difference between full and variable costing is their treatment of
fixed manufacturing overhead



Under full costing, fixed manufacturing overhead is included in inventory

 These costs enter into the determination of expense only when the inventory is
sold



Under variable costing, fixed manufacturing overhead becomes a period
expense

Learning objective 1: Explain the difference between full (absorption) and variable costing,
Slide 5-8

and prepare an income statement using variable costing.


Variable
Variable Costing
Costing Income
Income Statement
Statement



Classifies all expenses in terms of their cost behavior, either fixed or variable



With variable and fixed expenses separated, the contribution margin can be
presented

 Contribution margin is revenues minus total variable expenses



The contribution margin allows users to make reasonable estimates of how much
profit will change with changes in sales

Learning objective 1: Explain the difference between full (absorption) and variable costing,
Slide 5-9

and prepare an income statement using variable costing.

Variable
Variable Costing
Costing Income
Income Statement
Statement



Sales
are $100,000 and the contribution margin is $65,000
 



Calculate the contribution margin ratio:



Calculate the change in contribution margin if sales change by $10,000,000

$10,000,000 * 0.65 = $6,500,000

Learning objective 1: Explain the difference between full (absorption) and variable costing,
Slide 5-10

and prepare an income statement using variable costing.

Full
Full Costing
Costing Income
Income Statement
Statement Example
Example

Learning objective 1: Explain the difference between full (absorption) and variable costing,
Slide 5-11

and prepare an income statement using variable costing.


Variable
Variable Costing
Costing Income
Income Statement
Statement Example
Example

Learning objective 1: Explain the difference between full (absorption) and variable costing,
Slide 5-12

and prepare an income statement using variable costing.


Variable
Variable Costing
Costing vs.
vs. Full

Full
Costing
Costing Income
Income Statement
Statement



The full costing income statement cannot be used to estimate the
increase in profit due to an increase in sales



The reason is that cost of goods sold includes both fixed and variable
costs



The fixed costs will not increase when sales increase

 Under full costing we do not know how much of cost of goods sold is fixed
or variable

Learning objective 1: Explain the difference between full (absorption) and variable costing,
Slide 5-13

and prepare an income statement using variable costing.


Effects

Effects of
of Production
Production on
on Income
Income





Example – Clausen Tube
Selling price $2,000
Variable costs (per unit):










Materials = $600/unit
Labor = $225/unit
Variable mfg. overhead = $75/unit
Variable selling expense = $40/unit

Fixed mfg. overhead = $1,200,000
Fixed selling expense = $100,000

Fixed administrative expense = $500,000
Production = 5,000 units

Learning objective 2: Discuss the effect of production on full and variable costing income; explain the
impact of JIT (just-in-time) on the difference between full and variable costing income; and discuss the
benefits of variable costing for internal reporting purposes.

Slide 5-14


Clausen
Clausen Tube
Tube
Full
Full Cost
Cost per
per Unit
Unit
Full cost per unit for 5,000 units is calculated as follows:

Total Material Costs

$600 per unit

Total labor costs

$225 per unit

Total variable OH

$75 per unit

Fixed Overhead

Full Cost per Unit

$1,200,000/5,000 units

$240 per unit

= $1,140 per unit

Learning objective 2: Discuss the effect of production on full and variable costing income; explain the
impact of JIT (just-in-time) on the difference between full and variable costing income; and discuss the
benefits of variable costing for internal reporting purposes.
Slide 5-15


Clausen
Clausen Tube
Tube
Variable
Variable Cost
Cost per
per Unit
Unit
Variable cost per unit for 5,000 units is calculated as follows:

Total Material Costs

$600 per unit

Total labor costs

$225 per unit

Total variable OH

$75 per unit

Variable Cost per Unit

= $900 per unit

Learning objective 2: Discuss the effect of production on full and variable costing income; explain the
impact of JIT (just-in-time) on the difference between full and variable costing income; and discuss the
benefits of variable costing for internal reporting purposes.
Slide 5-16


Clausen
Clausen Tube
Tube –– Income
Income Statement
Statement










Selling price = $2,000/unit
Full cost = $1,140/unit
Variable cost = $900/unit
Variable selling expense = $40/unit
Fixed overhead = $1,200,000
Fixed selling expense = $100,000
Fixed administrative expense= $500,000

Learning objective 2: Discuss the effect of production on full and variable costing income; explain the
impact of JIT (just-in-time) on the difference between full and variable costing income; and discuss the
benefits of variable costing for internal reporting purposes.
Slide 5-17


Clausen
Clausen Tube
Tube –– Full
Full Costing
Costing Income
Income Statement
Statement
Production equals sales (5,000 units)

Learning objective 2: Discuss the effect of production on full and variable costing income; explain the
impact of JIT (just-in-time) on the difference between full and variable costing income; and discuss the
benefits of variable costing for internal reporting purposes.

Slide 5-18


Clausen
Clausen Tube
Tube –– Variable
Variable Costing
Costing Income
Income Statement
Statement
Production equals sales (5,000 units)

Learning objective 2: Discuss the effect of production on full and variable costing income; explain the
impact of JIT (just-in-time) on the difference between full and variable costing income; and discuss the
benefits of variable costing for internal reporting purposes.
Slide 5-19


Quantity
Quantity Produced
Produced Equals
Equals Quantity
Quantity Sold
Sold



When the quantity produced equals the quantity sold, there is no difference
between net income calculated using full cost versus variable costing




Since all units produced are sold, no fixed cost ends up in ending inventory
The only difference is that variable costing calculates the contribution margin

Learning objective 2: Discuss the effect of production on full and variable costing income; explain the
impact of JIT (just-in-time) on the difference between full and variable costing income; and discuss the
benefits of variable costing for internal reporting purposes.
Slide 5-20


Clausen
Clausen Tube
Tube
Full
Full Cost
Cost per
per Unit
Unit
Full cost per unit for 6,000 units is calculated as follows:

Total Material Costs

$600 per unit

Total labor costs

$225 per unit

Total variable OH

$75 per unit

Fixed Overhead

Full Cost per Unit

$1,200,000/6,000 units

$200 per unit

= $1,100 per unit

Learning objective 2: Discuss the effect of production on full and variable costing income; explain the
impact of JIT (just-in-time) on the difference between full and variable costing income; and discuss the
benefits of variable costing for internal reporting purposes.
Slide 5-21


Clausen
Clausen Tube
Tube –– Full
Full Costing
Costing Income
Income Statement
Statement
Production (6,000 units) is greater than sales (4,800 units)

Learning objective 2: Discuss the effect of production on full and variable costing income; explain the

impact of JIT (just-in-time) on the difference between full and variable costing income; and discuss the
benefits of variable costing for internal reporting purposes.
Slide 5-22


Clausen
Clausen Tube
Tube –– Variable
Variable Costing
Costing Income
Income Statement
Statement
Production (6,000 units) is greater than sales (4,800 units)

Learning objective 2: Discuss the effect of production on full and variable costing income; explain the
impact of JIT (just-in-time) on the difference between full and variable costing income; and discuss the
benefits of variable costing for internal reporting purposes.
Slide 5-23


Quantity
Quantity Produced
Produced is
is Greater
Greater Than
Than Quantity
Quantity Sold
Sold



When the quantity produced is greater than the quantity sold income will be
greater under full costing as opposed to variable costing




Under full costing, inventory cost includes fixed manufacturing overhead
Under variable costing, fixed manufacturing overhead is a period cost

Learning objective 2: Discuss the effect of production on full and variable costing income; explain the
impact of JIT (just-in-time) on the difference between full and variable costing income; and discuss the
benefits of variable costing for internal reporting purposes.
Slide 5-24


Clausen
Clausen Tube
Tube
Full
Full Cost
Cost per
per Unit
Unit
Full cost per unit for 6,000 units is calculated as follows:

Total Material Costs

$600 per unit

Total labor costs

$225 per unit

Total variable OH

$75 per unit

Fixed Overhead

Full Cost per Unit

$1,200,000/6,000 units

$200 per unit

= $1,100 per unit

Learning objective 2: Discuss the effect of production on full and variable costing income; explain the
impact of JIT (just-in-time) on the difference between full and variable costing income; and discuss the
benefits of variable costing for internal reporting purposes.
Slide 5-25