1 3 Standard Costing, Variable Costing, and Throughput Costing Prepared by Douglas Cloud Pepperdine University

After reading this chapter, you should be able to: Objectives Describe standard costing and explain why it is the predominant costing method. Develop standard fixed overhead rates and apply fixed overhead to products. Prepare standard absorption costing income statement. Compare, contrast, and distinguish actual, normal, and standard costing. After reading this chapter, you should be able to: Continued

Objectives Explain why variable costing offers advantages over absorption costing for internal reporting purposes. Prepare variable costing income statements. Describe throughput costing and prepare income statements.

Standard Absorption Costing Under standard costing inventories appear at standard cost, not actual or normal cost.

Standard Absorption Costing An important reason for using standard costing is that it integrates standard costs and variances into the company’s record.

SMP Company, Operating Data 20X1 Production in units 110,000 Sales in units, at $80 each 90,000 Ending inventory in units 20,000 Actual production costs: Variable $2,255,000 Fixed $3,200,000 Selling and administrative expenses: Variable at $5 per unit $450,000 Fixed $1,400,000 Standards and budgets: Budgeted fixed production costs $3,000,000 Standard variable production costs $20 per unit

Calculating A Standard Fixed Cost The standard fixed cost per unit depends on two things: (1) The choice of a measure of activity (e.g., direct labor hours, machine hours, setup time etc.). (2) A level of activity.

Calculating A Standard Fixed Cost Normal activity is the average activity expected or budgeted over the coming two to five years. Theoretical activity is the absolute maximum that a plant can produce, with no interruptions or problems at all. Practical activity is the maximum activity the company can achieve given the usual kinds of interruptions.

Calculating A Standard Fixed Cost SMP’s management decides to set the standard per-unit fixed cost using normal capacity of 100,000 units. Standard fixed cost per unit = Budgeted fixed production costs Level of activity = $3,000,000 100,000 = $30 per unit

Variances Total actual variable production cost (for source of data, turn click on button below) $2,255,000 Standard variable costs (110,000 x $20) 2,200,000 Unfavorable variable cost variances $ 55,000

Variances Total actual fixed overhead $3,200,000 Fixed overhead applied (110,000 x $30) 3,300,000 Overapplied overhead $ 100,000

Variances Budgeted fixed overhead Actual fixed overhead Applied fixed overhead $3,200,000 $3,000,000 $3,300,000 (110,000 x $30) Budget variance Volume variance $200,000 U $300,000 F $100,000 F Overapplied overhead 14 9

SMP Company, Fixed Overhead, 20X1 Applied at 110,000 units $3,300,000 $3,200,000 $3,000,000 Volume Variance $300,000 F Actual $3,200,000 Budget Variance $200,000 U Budget variance, $200,000 U Budget Dollars Applied, $30 x units produced 100,000 110,000 Production in Units

SMP Company, Income Statement for 20X1 Sales $7,200,000 Standard cost of sales: Beginning inventory $ 0 Standard variable production costs 2,200,000 Applied fixed production costs 3,300,000 Cost of goods available for sale $5,500,000 Ending inventory 1,000,000 Standard cost of sales 4,500,000 Standard gross margin $2,700,000 Continued

Standard gross margin $2,700,000 Variances: Fixed manufacturing cost budget variance $200,000 U Fixed manufacturing cost volume variance 300,000 F Variable manufacturing cost variance 55,000 U 45,000 F Actual gross margin $2,745,000 Selling and administrative expenses 1,850,000 Profit $ 895,000

SMP Company, Income Statement for 20X1 Sales $7,200,000 Cost of sales: Standard cost of sales $4,500,000 Variances: Fixed manufacturing cost budget variance 200,000 U Fixed manufacturing cost volume variance 300,000 F Variable manufacturing cost variances 55,000 U Cost of sales 4,455,000 Gross margin $2,745,000 Selling and administrative expenses 1,850,000 Profit $ 895,000 Alternative Format

Review Problem SMP, 20X1 Production, in units 95,000 Sales, in units, at $80 each 100,000 Ending inventory, in units 15,000 Actual production costs: Variable $1,881,000 Fixed $2,950,000 Selling and administrative expenses: Variable at $5 per unit $ 500,000 Fixed $1,400,000 Standard variable production cost (per unit) $20 Budgeted fixed production costs $3,000,000

SMP Company, Income Statement for 20X1 Sales $8,000,000 Standard cost of sales: Beginning inventory $1,000,000 Standard variable production costs 1,900,000 Applied fixed production costs 2,850,000 Cost of goods available for sale $5,750,000 Ending inventory 750,000 Standard cost of sales $5,000,000 Variances: Fixed mfg. cost budget variance 50,000 F Fixed mfg. cost volume variance 150,000 U Variable mfg. cost variances 19,000 F Continued

Variable cost: $1,881,000 – ($20 x 95,000) = $19,000 F Sales (100,000 x $80) $8,000,000 Cost of sales 5,081,000 Gross margin $2,919,000 Selling and administrative expenses 1,900,000 Profit $1,019,000 Variances: Variable cost: $1,881,000 – ($20 x 95,000) = $19,000 F

SMP Company Example Budgeted fixed overhead Actual fixed overhead Applied fixed overhead $2,950,000 $3,000,000 ( 95,000 x $30) Budget variance Volume variance $50,000 F $150,000 U $2,850,000 $100,000 Total fixed overhead variances

Multiple Products and Activity-Based Costing ARG Company Portable Model Table Model Standard direct labor hours 8 12 Number of component parts 100 200 Budgeted production 6,000 2,000 Total budgeted use of components 600,000 400,000 Standard fixed overhead rate per component ($500,000/(600,000 + 400,000) = $0.50

Multiple Products and Activity-Based Costing ARG Company Portable Model Table Model Material related: Portable model ($100 x $0.50) $50 Table model (200 x $0.50) $100 Direct labor-related: Portable model (8 hours x $4) 32 Table model (12 hours x $4) 48 Standard fixed overhead cost per unit $82 $148

ARG Company Example Budgeted Cost Actual Cost Applied Cost $510,000 $500,000 $550,000 Budget variance Volume variance $10,000 U $50,000 F $40,000 Total overapplied overhead

Comparison of Standard and Normal Costing Manufacturing Costs Direct Direct Materials Labor Overhead Actual cost system Actual Actual Actual Normal cost system Actual Actual Applied Standard cost system Standard Standard Standard 10 12 7

Variable Costing Variable costing excludes fixed production costs from the unit costs of inventories, and treats all fixed costs as expenses in the period incurred. 15 12

Flow of Costs in a Manufacturing Firm Materials Inventory Direct Labor Variable Manufacturing Overhead Fixed Manufacturing Overhead Work in Process Inventory Cost of Goods Sold on income statement Finished Goods Inventory Absorption costing Expense on income statement

SMP Company, Income Statement for 20X1—Actual Variable Costing Sales $7,200,000 Variable cost of sales: Beginning inventory $ 0 Actual variable production costs 2,255,000 Cost of goods available for sale $2,255,000 Ending inventory 410,000 Variable cost of sales 1,845,000 Variable manufacturing margin $5,355,000 Variable selling and administrative exp. 450,000 Contribution margin $4,905,000 Actual fixed costs 4,600,000 Profit $ 305,000

SMP Company, Income Statement for 20X2—Actual Variable Costing Sales $8,000,000 Variable cost of sales: Beginning inventory $ 410,000 Actual variable production costs 1,881,000 Cost of goods available for sale $2,291,000 Ending inventory 297,000 Variable cost of sales 1,994,000 Variable manufacturing margin $6,006,000 Variable selling and administrative exp. 500,000 Contribution margin $5,506,000 Actual fixed costs 4,350,000 Profit $ 1,156,000

SMP Company, Standard Variable Costing Income Statement for 20x2 Sales $8,000,000 Variable standard cost of goods sold 2,000,000 Standard variable manufacturing margin $6,000,000 Variable manufacturing cost variances 19,000 Variable manufacturing margin $6,019,000 Variable selling and administrative 500,000 Contribution margin $5,519,000 Actual fixed costs: Budgeted fixed mfg. costs $3,000,000 Fixed mfg. cost budget variance $50,000 Selling and administrative 1,400,000 4,350,000 Profit $1,169,000 F F

Reconciliation of Incomes—Variable and Absorption Costing 20x1 20x2 Variable costing net income $ 295,000 $1,169,000 Absorption costing net income 895,000 1,019,000 Difference to be explained $ (600,000 ) $ 150,000 Explanation of income differences: Fixed production costs-beg. inventory $ 0 $ 600,000 Fixed production costs during year 3,200,000 2,950,000 $3,200,000 $3,550,000 Less fixed production costs-end. inventory 600,000 450,000 Total fixed costs expensed—absorption costing $2,600,000 $3,100,000 Total fixed costs expensed—variable costing 3,200,000 2,950,000 Difference in incomes $ (600,000 ) $ 150,000

Throughput Costing An extreme form of variable costing which follows the principles of the Theory of Constraints. It is a radical departure from other methods in that it treats all costs except unused materials as expenses. It does not record work in process or finished goods inventories. It treats all direct labor and manufacturing overhead costs as period costs expensing them as they are incurred.

Income Statement Comparison Absorption Costing Variable Costing Throughput Costing Sales $180,000 $180,000 $180,000 Cost of sales 90,000 63,000 50,000 Gross margin 90,000 117,000 130,000 Other expenses: Other mfg. costs 30,000 50,000 Selling and admin. 15,000 15,000 15,000 Total other expenses 15,000 45,000 65,000 Income $ 75,000 $ 72,000 $ 65,000

Chapter 13 The End

SMP Company, Operating Data 20X1 Production in ;units 110,000 Sales in units, at $80 each 90,000 Ending inventory in units 20,000 Actual production costs: Variable $2,255,000 Fixed $3,200,000 Selling and administrative expenses: Variable at $5 per unit $450,000 Fixed $1,400,000 Standards and budgets: Budgeted fixed production costs $3,000,000 Standard variable production costs $20 per unit Return to Slide 13-10