PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Super-variable Costing Appendix 6A

6A-2 Learning Objective 6 (Appendix 6A) Prepare an income statement using super- variable costing and reconcile this approach with variable costing.

6A-3 Overview of Variable and Super- variable Costing Direct Materials Direct Labor Fixed Manufacturing Overhead Fixed Selling and Administrative Expenses Variable Costing Super- variable Costing Product Costs Period Costs Product Cost Period Costs Super-variable costing classifies all direct labor and manufacturing overhead costs as fixed period costs and only direct materials as a variable product cost. To simplify, in this appendix we also assume that selling and administrative expenses are entirely fixed.

6A-4 Unit Cost Computations Harvey Company produces a single product with the following information available:

6A-5 Unit product cost is determined as follows: Unit Cost Computations Under super-variable costing, only the direct material costs are included in product costs. Under variable costing, direct materials and direct labor are included when determining unit product cost.

6A-6 Let’s assume the following additional information for Harvey Company. ▫ 20,000 units were sold during the year at a price of $30 each. ▫ There is no beginning inventory. Now, let’s compute net operating income using both super-variable and variable costing. Variable and Super-variable Costing Income Statements

6A-7 Super-variable Costing Contribution Format Income Statement Direct material costs only. All direct labor costs are expensed.

6A-8 Direct material and direct labor costs. Direct labor cost deferred in inventory is 5,000 units × $3 = $15,000. Variable Costing Contribution Format Income Statement

6A-9 Comparing the Two Methods

6A-10 Direct labor $75,000 Units produced 25,000 units = = $3 per unit We can reconcile the difference between super-variable and variable income as follows: Comparing the Two Methods

6A-11 Extended Comparisons of Income Data Harvey Company – Year Two

6A-12 Since the variable costs per unit, total fixed costs, and the number of units produced remained unchanged, the unit cost computations also remain unchanged. Unit Cost Computations

6A-13 Direct material costs only. All direct labor costs are expensed. Super-variable Costing Contribution Format Income Statement

6A-14 Variable Costing Contribution Format Income Statement Direct material and direct labor costs. Direct labor cost released from inventory is 5,000 units × $3 = $15,000.

6A-15 Comparing the Two Methods Direct labor $75,000 Units produced 25,000 units = = $3 per unit We can reconcile the difference between super-variable and variable income as follows:

6A-16 Comparing the Two Methods

6A-17 End of Appendix 6A