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

2. 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

3. 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.

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

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

6. 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

7. 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.

8. 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.

9. 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

10. 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 $ ,000

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

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

13. 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
Production in Units

14. SMP Company, Income Statement for 20X1
Sales $7,200,000
Standard cost of sales:
Beginning inventory $
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

15. 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 ,000 U ,000 F
Actual gross margin $2,745,000
Selling and administrative expenses 1,850,000
Profit $ 895,000

16. 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 ,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

17. 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 $ ,000
Fixed $1,400,000
Standard variable production cost (per unit) $20
Budgeted fixed production costs $3,000,000

18. 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 ,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 ,000 F
Continued

19. 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

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

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

22. 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)
Standard fixed overhead cost per unit $82 $148

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

24. 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

25. 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

26. 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

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

28. 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 ,000
Variable cost of sales 1,994,000
Variable manufacturing margin $6,006,000
Variable selling and administrative exp ,000
Contribution margin $5,506,000
Actual fixed costs 4,350,000
Profit $ 1,156,000

29. 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 ,000
Variable manufacturing margin $6,019,000
Variable selling and administrative ,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, ,350,000
Profit $1,169,000 F F

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

31. 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.

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

33. Chapter 13
The End

35. 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
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