2. CHAPTER 5
Variable Costing

3. Full (Absorption) Costing
Inventory costs include:
-direct materials used
-direct labor incurred
-both fixed & variable manufacturing overhead
Required by GAAP for external reporting purposes
Learning objective 1: Explain the difference between full (absorption) and variable costing

4. Review 1 Answer: d. Full costing
Which of the following complies with GAAP for external reporting purposes?
Absolute costing
Variable costing
Fixed costing
Full costing
Answer:
d. Full costing
Learning objective 1: Explain the difference between full (absorption) and variable costing

5. Full (Absorption) Costing
Learning objective 1: Explain the difference between full (absorption) and variable costing

6. 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
Learning objective 1: Explain the difference between full (absorption) and variable costing

7. Variable Costing
Learning objective 1: Explain the difference between full (absorption) and variable costing

8. Difference Between Full and Variable Costing
Treatment of fixed manufacturing overhead
Under full costing, it is included in inventory and expensed when the product is sold
Under variable costing, it is considered a period cost and expensed in the period incurred.
Learning objective 1: Explain the difference between full (absorption) and variable costing

9. Variable Costing Income Statement
Utilizes the contribution margin approach
- Contribution margin ratio = contribution margin/sales
Can help in decision making - Contribution margin ratio x change in sales = change in contribution margin - Fixed costs stay the same when sales change
Learning objective 2: Prepare an income statement using variable costing.

10. Review 2 Answer: b. Variable costing Absolute costing Variable costing
Which of the following provides information helpful to internal decision making?
Absolute costing
Variable costing
Fixed costing
Full costing
Answer:
b. Variable costing
Learning objective 2: Prepare an income statement using variable costing.

11. Exercise 1 Sales are $100,000 and contribution margin is $65,000
Calculate the contribution margin ratio:
$65,000 / $100,000 = 0.65 or 65%
Calculate the change in contribution margin if sales change by $10,000
$10,000 X 0.65 = $6,500
Learning objective 2: Prepare an income statement using variable costing.

12. Variable Costing Income Statement Example
Learning objective 2: Prepare an income statement using variable costing.

13. Full Costing Income Statement Example
Learning objective 2: Prepare an income statement using variable costing.

14. 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
Learning objective 3: Discuss the effect of production on full and variable costing income.

15. Clausen Tube - Full Cost/Unit
Full cost/unit (5,000 units) is calculated as follows:
Total Material Costs
$600/unit
Total labor costs
$225/unit
Total variable OH
$75/unit
Fixed Overhead
$1,200,000/5000 units
$240/unit
Full Cost/Unit
= $1,140/unit
Learning objective 3: Discuss the effect of production on full and variable costing income.

16. Clausen Tube – Variable Cost/Unit
Variable unit cost is calculated as follows:
Unit materials cost = $600
Unit labor cost = $225
Unit variable overhead = $75
Variable cost per unit =
$600 + $225 + $75 = $900 per unit
Learning objective 3: Discuss the effect of production on full and variable costing income.

17. Clausen Tube – Income Statement
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.

18. Clausen Tube – Income Statements
Production equals sales (5,000 units)
Learning objective 3: Discuss the effect of production on full and variable costing income.

19. Clausen Tube – Income Statements
Production (5,000) is greater than sales (4,000)
Learning objective 3: Discuss the effect of production on full and variable costing income.

20. Clausen Tube – Income Statements
Production (5,000) less than sales (6,000)
Learning objective 3: Discuss the effect of production on full and variable costing income.

21. Variable Costing for External Reporting
Learning objective 3: Discuss the effect of production on full and variable costing income.

22. Exercise 2
Summit Manufacturing, Inc. produces snow shovels. The selling price is $25. Costs are:
Production is 42,000 snow shovels. Calculate full cost/unit. (4 x 42,000) + (3 x 42,000) + (2 x 42,000)+ 168,000) = 546,000 / 42,000 = $13/unit
Learning objective 3: Discuss the effect of production on full and variable costing income.

23. Exercise 3
Summit Manufacturing, Inc. produces snow shovels. The selling price is $25. Costs are:
Production is 42,000 snow shovels. Calculate variable cost/unit. ( ) = 9 per unit
Learning objective 3: Discuss the effect of production on full and variable costing income.

24. Exercise 4
Summit Manufacturing, Inc. produces snow shovels. The selling price is $25. Costs are:
Sales are 38,500 snow shovels. Calculate net income using full cost.
Learning objective 3: Discuss the effect of production on full and variable costing income.

25. Exercise 5
Summit Manufacturing, Inc. produces snow shovels. The selling price is $25. Costs are:
Sales are 38,500 snow shovels. Calculate net income using variable cost.
Learning objective 3: Discuss the effect of production on full and variable costing income.

26. Impact of Method Selection on Income Statement
Units produced = units sold
No difference in net income
Units produced greater than units sold
Full costing yields higher net income
Units Produced less than units sold
Variable costing yields higher net income
Learning objective 3: Discuss the effect of production on full and variable costing income.

27. Review 3 If units produced exceed units sold: Answer:
Full costing yields a higher income than variable costing
Full costing yields a lower income than variable costing
Full costing and variable costing yield the same income
Variable costing yields a higher income than full costing
Answer:
Learning objective 3: Discuss the effect of production on full and variable costing income.

28. Review 4 If units produced are less than units sold: Answer:
Full costing yields a higher income than variable costing
Full costing yields a lower income than variable costing
Full costing and variable costing yield the same income
Variable costing yields a lower income than full costing
Answer:
Learning objective 3: Discuss the effect of production on full and variable costing income.

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

30. Impact of JIT on Income
Companies using JIT typically have low levels of inventory
Units produced are approximately equal to units sold
Difference between full and variable costing is likely to be very small.
Learning objective 4: Explain the impact of JIT on the difference between full and variable costing income

31. Benefits of Variable Costing for Internal Reporting
Variable costing facilitates cost-volume-profit (CVP) analysis
-separates fixed and variable costs
-easily calculate the change in income when sales change
Learning objective 5: Discuss the benefits of variable costing for internal reporting purposes

32. Benefits of Variable Costing for Internal Reporting
Variable costing limits management of earnings via production volume
-Managers are often compensated based on income in their division
-Full costing produces higher income when production is greater than sales
-Managers have an incentive to manage earnings under full costing
Learning objective 5: Discuss the benefits of variable costing for internal reporting purposes

33. Impact of Changes in Sales
Learning objective 5: Discuss the benefits of variable costing for internal reporting purposes

34. Copyright
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