Variable Costing: A Tool for Management Chapter5 Variable Costing: A Tool for Management

Overview of Absorption and Variable Costing

Penghitungan Biaya per Unit Harvey Co. memproduksi satu produk jadi, berikut ini informasi :

Penghitungan Biaya per Unit Unit product cost is determined as follows: Selling and administrative expenses are always treated as period expenses and deducted from revenue.

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 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. Variable costs only. All fixed manufacturing overhead is expensed.

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 between absorption 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.

Unit product cost is determined as follows: 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 costing is used.

produced in the current period. Harvey Co. Year 2 These are the 25,000 units produced in the current period.

Next, we’ll look at Harvey’s income statement Harvey Co. Year 2 Next, we’ll look at Harvey’s income statement assuming is used. Variable costing

All fixed manufacturing overhead is expensed. Harvey Co. Year 2 Variable costs only. All fixed manufacturing overhead is expensed.

Summary

Summary

Advantages of the Contribution Approach Consistent with CVP analysis. Management finds it easy to understand. Net income is closer to net cash flow. Consistent with standard costs and flexible budgeting. Advantages Easier to estimate profitability of products and segments. Impact of fixed costs on profits emphasized. Profit is not affected by changes in inventories.

End of Chapter 7

Variable versus Absorption Costing Fixed costs are not really the costs of any particular product. All manufacturing costs must be assigned to products to properly match revenues and costs. Absorption Costing Variable Costing

Variable versus Absorption Costing These are capacity costs and will be incurred if nothing is produced. Depreciation, taxes, insurance and salaries are just as essential to products as variable costs. Absorption Costing Variable Costing

Variable versus Absorption Costing I guess we won’t be solving this controversy today!

Impact of JIT Inventory Methods In a JIT inventory system . . . Production tends to equal sales . . . So, the difference between variable and absorption income tends to disappear.