Managerial Accounting Basic Variable and Full Costing Prepared by Diane Tanner University of North Florida Copyright ©2015. University of North Florida. All rights reserved.

Measuring Product Costs Includes all costs necessary to get products ready to sell Two methods to determine product costs Full (absorption) costing Required for GAAP reporting Emphasizes the cost function Variable costing Used for internal decision making Emphasizes cost behavior Helps managers make product decisions as it is easy to predict how costs will behave in the future

Reporting Product Costs Merchandising companies Buy goods to sell Product costs reported Merchandise Inventory on the balance sheet Cost of Goods Sold on the income statement Manufacturing companies Buy materials to produce products to sell Raw Materials, Work in Process, Finished Goods on the balance sheet

Components of Product Costs Inventoriable costs include Direct materials Direct labor Variable manufacturing overhead costs Fixed manufacturing overhead costs Full Costing Inventoriable costs include Direct materials Direct labor Variable manufacturing overhead costs Variable Costing

Two Forms of Income Statements Full costing income statement Costs are reported based on function Product versus period Gross margin is the amount available to cover operating expenses and to go towards profit. Variable costing income statement Costs are reported based on behavior Variable versus fixed Contribution margin is the amount available to cover fixed costs and to go towards profit.

Contribution Margin (in $) GP Ratio vs. CM Ratio Contribution Margin (in $) Sales (in $) Contribution Margin Ratio = Indicates the portion of every sales dollar available to cover fixed costs and to go towards profit Interpretation Gross Profit (in $) Sales (in $) Gross Profit Ratio = Indicates the portion of every sales dollar available to cover operating costs and to go towards profit Interpretation

Expanded GAAP Income Statement Sales $100,000 Cost of goods sold: Variable product costs $22,000 Fixed product costs 11,000 Total cost of goods sold 33,000 Gross margin (gross profit) 67,000 Operating expenses: Variable period costs 38,000 Fixed period costs 19,000 Total operating expenses 57,000 Net operating income $10,000 $67,000 $100,000 Gross profit Sales = = 67.00%

Expanded Variable Costing Income Statement Sales $100,000 Variable costs: Variable product costs $22,000 Variable period costs 38,000 Total variable costs 60,000 Contribution margin 40,000 Fixed expenses: Fixed product costs 11,000 Fixed period costs 19,000 Total fixed expenses 30,000 Net operating income $10,000 $40,000 $100,000 Contribution Margin Sales = = 40.00%

The Contribution Approach Consider the following information developed by the accountant at Element Skateboard Co: For each additional skateboard sold, profit will increase by $200. Fixed costs in total do not change. CMR: = $200/$500 = 40% For each sales dollar generated by Element, profit will increase by $0.40. Fixed costs in total do not change.

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