Managerial accounting 5th jiambalvo ch05

Prepared by
Debby Bloom-Hill
CMA, CFM


CHAPTER 5
Variable Costing

Slide 5-2


Full (Absorption) Costing
 Required by GAAP for external reporting
purposes
 Inventory costs include:


Direct materials used




Direct labor incurred




Generally variable

Manufacturing overhead


Slide 5-3

Generally variable

Includes both fixed and variable costs

Learning objective 1: Explain the difference
between full (absorption) and variable costing


Variable 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

Slide 5-4

Learning objective 1: Explain the difference
between full (absorption) and variable costing


Test Your Knowledge 1
Which of the following complies with GAAP

for external reporting purposes?
a. Absolute costing
b. Variable costing
c. Fixed costing
d. 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


Full (Absorption) Costing

Slide 5-6

Learning objective 1: Explain the difference
between full (absorption) and variable costing


Variable Costing

Slide 5-7

Learning objective 1: Explain the difference
between full (absorption) and variable costing

Difference Between Full and
Variable 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
Slide 5-8

Learning objective 1: Explain the difference
between full (absorption) and variable costing


Variable Costing Income
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

Slide 5-9

Learning objective 2: Prepare an
income statement using variable costing.


Variable Costing Income
Statement
 Sales are $100,000 and contribution
margin is $65,000
 Calculate the contribution margin ratio:
 Calculate the change in contribution
margin if sales change by $10,000

$10,000 * 0.65 = $6,500

Slide 5-10

Learning objective 2: Prepare an
income statement using variable costing.


Variable Costing Income
Statement Example

Slide 5-11

Learning objective 2: Prepare an
income statement using variable costing.


Full Costing Income Statement
Example

Slide 5-12

Learning objective 2: Prepare an
income statement using variable costing.


Variable Costing vs. Full
Costing Income 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
Slide 5-13

Learning objective 2: Prepare an
income statement using variable costing.

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
 Production = 5,000 units

Slide 5-14

Learning objective 3: Discuss the effect of
production on full and variable costing income.


Clausen Tube
Full Cost per 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
Fixed Overhead
Full Cost per Unit

Slide 5-15

$75 per unit
$1,200,000/5,000
units

$240 per unit
= $1,140 per unit

Learning objective 3: Discuss the effect of
production on full and variable costing income.


Clausen Tube
Variable Cost per 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

Variable Cost per Unit

Slide 5-16

$75 per unit
= $900 per unit

Learning objective 3: Discuss the effect of
production on full and variable costing income.


Clausen Tube – Income
Statement








Slide 5-17

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 3: Discuss the effect of
production on full and variable costing income.


Clausen Tube – Income
Statements
Production equals sales (5,000 units)

Slide 5-18

Learning objective 3: Discuss the effect of
production on full and variable costing income.


Quantity Produced Equals
Quantity 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

Slide 5-19

Learning objective 3: Discuss the effect of
production on full and variable costing income.

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

Slide 5-20

Learning objective 3: Discuss the effect of
production on full and variable costing income.


Quantity Produced is Greater
Than Quantity 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

Slide 5-21

Learning objective 3: Discuss the effect of
production on full and variable costing income.

Clausen Tube – Income
Statements
Production (6,000 units) is less than sales
(7,200 units)

Slide 5-22

Learning objective 3: Discuss the effect of
production on full and variable costing income.


Quantity Produced is Less
Than Quantity Sold
 Then the quantity produced is less than the
quantity sold, income will be greater under
variable costing as opposed to full costing
 Beginning inventory under fixed costing
includes fixed manufacturing overhead
 When the beginning inventory is charged to
cost of goods sold the charge will be higher
under full costing

Slide 5-23

Learning objective 3: Discuss the effect of
production on full and variable costing income.


Variable Costing for External
Reporting

Slide 5-24

Learning objective 3: Discuss the effect of
production on full and variable costing income.


Test Your Knowledge 2
Summit Manufacturing, Inc. produces snow
shovels. The selling price is $25. Costs are:

Production is 42,000 snow shovels.
Calculate full cost per unit.
Slide 5-25

Learning objective 3: Discuss the effect of
production on full and variable costing income.