slide 5-2 chapter 5 variable costing slide 5-3 full (absorption) costing inventory costs include :...
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Slide 5-2
CHAPTER 5CHAPTER 5CHAPTER 5CHAPTER 5
Variable CostingVariable CostingVariable CostingVariable Costing
Slide 5-3
Full (Absorption) CostingFull (Absorption) CostingFull (Absorption) CostingFull (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
Slide 5-4
Which of the following complies with GAAP for external reporting purposes?
a. Absolute costingb. Variable costingc. Fixed costingd. Full costing
Answer:d. Full costing
Learning objective 1: Explain the difference between full (absorption) and variable costing
Slide 5-5
Full (Absorption) CostingFull (Absorption) CostingFull (Absorption) CostingFull (Absorption) Costing
Learning objective 1: Explain the difference between full (absorption) and variable costing
Slide 5-6
Variable CostingVariable CostingVariable CostingVariable 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
Slide 5-7
Variable CostingVariable CostingVariable CostingVariable Costing
Learning objective 1: Explain the difference between full (absorption) and variable costing
Slide 5-8
Difference Between Full and Difference Between Full and Variable CostingVariable Costing
Difference Between Full and Difference Between Full and Variable CostingVariable 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
Slide 5-9
Variable Costing Income Variable Costing Income StatementStatement
Variable Costing Income Variable Costing Income StatementStatement
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.
Slide 5-10
Which of the following provides information helpful to internal decision making?a. Absolute costingb. Variable costingc. Fixed costingd. Full costing
Answer:b. Variable costing
Learning objective 2: Prepare an income statement using variable costing.
Slide 5-11
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.
Slide 5-12
Variable Costing Income Variable Costing Income Statement ExampleStatement Example
Variable Costing Income Variable Costing Income Statement ExampleStatement Example
Learning objective 2: Prepare an income statement using variable costing.
Slide 5-13
Full Costing Income Statement Full Costing Income Statement ExampleExample
Full Costing Income Statement Full Costing Income Statement ExampleExample
Learning objective 2: Prepare an income statement using variable costing.
Slide 5-14
Example - Clausen Tube Example - Clausen Tube Example - Clausen Tube 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.
Slide 5-15
Clausen Tube - Full Clausen Tube - Full Cost/UnitCost/Unit
Clausen Tube - Full Clausen Tube - Full Cost/UnitCost/Unit
Full cost/unit (5,000 units) is calculated as follows:
Learning objective 3: Discuss the effect of production on full and variable costing income.
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
Slide 5-16
Clausen Tube – Clausen Tube – Variable Cost/UnitVariable Cost/UnitClausen Tube – Clausen Tube –
Variable Cost/UnitVariable 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.
Slide 5-17
Clausen Tube – Income Clausen Tube – Income StatementStatement
Clausen Tube – Income Clausen Tube – Income StatementStatement
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.
Slide 5-18
Clausen Tube – Income Clausen Tube – Income StatementsStatements
Clausen Tube – Income Clausen Tube – Income StatementsStatements
Production equals sales (5,000 units)
Sales 5,000 x $2,000 = 10,000,000 Cost of goods sold 5,000 x $1,140 = 5,700,000 Gross margin 4,300,000 Selling & Admin Expenses* 800,000 Net Income 3,500,000
Sales 5,000 x $2,000 = 10,000,000
Variable costs5,000 x $900 +(5,000 x $40)= 4,700,000
Contribution margin 5,300,000 Fixed costs** 1,800,000 Net Income 3,500,000
Full Cost
Variable Cost*100,000 + 500,000 + (5,000 x $40)
**1,200,000 + 100,000 + 500,000
Learning objective 3: Discuss the effect of production on full and variable costing income.
Slide 5-19
Clausen Tube – Income Clausen Tube – Income StatementsStatements
Clausen Tube – Income Clausen Tube – Income StatementsStatements
Production (5,000) is greater than sales (4,000)
Sales 4,000 x $2,000 = 8,000,000 Cost of goods sold 4,000 x $1,140 = 4,560,000 Gross margin 3,440,000 Selling & Admin Expenses* 760,000 Net Income 2,680,000
Sales 4,000 x $2,000 = 8,000,000
Variable Costs4,000 x $900 + (4,000 x $40) = 3,760,000
Contribution margin 4,240,000 Fixed Costs** 1,800,000 Net Income 2,440,000
Full Cost
Variable Cost*100,000 + 500,000 + (4,000 x $40)
**1,200,000 + 100,000 + 500,000
Learning objective 3: Discuss the effect of production on full and variable costing income.
Slide 5-20
Clausen Tube – Income Clausen Tube – Income StatementsStatements
Clausen Tube – Income Clausen Tube – Income StatementsStatements
Production (5,000) less than sales (6,000)
Sales 6,000 x $2,000 = 12,000,000 Cost of goods sold 6,000 x $1,140 = 6,840,000 Gross margin 5,160,000 Selling & Admin Expenses* 840,000 Net Income 4,320,000
Sales 6,000 X 2,000 = 12,000,000
Variable costs6,000 X 900 +(6,000 x$40) = 5,640,000
Contribution margin 6,360,000 Fixed costs** 1,800,000 Net Income 4,560,000
Full Cost
Variable Cost*100,000 + 500,000 + (6,000 x 40)
**1,200,000 + 100,000 + 500,000
Learning objective 3: Discuss the effect of production on full and variable costing income.
Slide 5-21
Variable Costing for External Variable Costing for External ReportingReporting
Variable Costing for External Variable Costing for External ReportingReporting
Learning objective 3: Discuss the effect of production on full and variable costing income.
Slide 5-22
Summit Manufacturing, Inc. produces snow shovels. The selling price is $25. Costs are:
Materials 4 Labor 3 Variable Overhead 2 Fixed Overhead 168,000 Variable Selling & Admin 1 Fixed Selling & Admin 152,000
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.
Slide 5-23
Summit Manufacturing, Inc. produces snow shovels. The selling price is $25. Costs are:
Materials 4 Labor 3 Variable Overhead 2 Fixed Overhead 168,000 Variable Selling & Admin 1 Fixed Selling & Admin 152,000
Production is 42,000 snow shovels. Calculate variable cost/unit.
(4 + 3 + 2) = 9 per unit
Learning objective 3: Discuss the effect of production on full and variable costing income.
Slide 5-24
Summit Manufacturing, Inc. produces snow shovels. The selling price is $25. Costs are:
Full Cost Unit Cost 13 Variable Unit Cost 9 Fixed Overhead 168,000 Variable Selling & Admin 1 Fixed Selling & Admin 152,000
Sales are 38,500 snow shovels. Calculate net income using full cost.
Sales 38,500 x $25 962,500 Cost of Goods Sold 38,500 x $13 500,500 Selling & Admin 152,000 + 38,500 x $1 190,500 Net Income 271,500
Learning objective 3: Discuss the effect of production on full and variable costing income.
Slide 5-25
Summit Manufacturing, Inc. produces snow shovels. The selling price is $25. Costs are:
Full Cost Unit Cost 13 Variable Unit Cost 9 Fixed Overhead 168,000 Variable Selling & Admin 1 Fixed Selling & Admin 152,000
Sales are 38,500 snow shovels. Calculate net income using variable cost.
Sales 38,500 X 25 962,500 Variable Cost of Sales 38,500 X 9 346,500 Variable Selling & Admin 152,000 + 38,500 X 1 38,500 Fixed Overhead 168,000 Fixed Selling and Admin 152,000 Net Income 257,500
Learning objective 3: Discuss the effect of production on full and variable costing income.
Slide 5-26
Impact of Method Selection on Impact of Method Selection on Income StatementIncome Statement
Impact of Method Selection on Impact of Method Selection on Income StatementIncome Statement
Units produced = units soldNo difference in net income
Units produced greater than units soldFull costing yields higher net income
Units Produced less than units soldVariable costing yields higher net income
Learning objective 3: Discuss the effect of production on full and variable costing income.
Slide 5-27
If units produced exceed units sold:
a. Full costing yields a higher income than variable costing
b. Full costing yields a lower income than variable costing
c. Full costing and variable costing yield the same income
d. Variable costing yields a higher income than full costing
Answer:a. Full costing yields a higher income
than variable costing
Learning objective 3: Discuss the effect of production on full and variable costing income.
Slide 5-28
If units produced are less than units sold:
a. Full costing yields a higher income than variable costing
b. Full costing yields a lower income than variable costing
c. Full costing and variable costing yield the same income
d. Variable costing yields a lower income than full costing
Answer:b. Full costing yields a lower income than
variable costing
Learning objective 3: Discuss the effect of production on full and variable costing income.
Slide 5-29
Reducing ProductionReducing ProductionReducing ProductionReducing Production
Learning objective 3: Discuss the effect of production on full and variable costing income.
Slide 5-30
Impact of JIT on IncomeImpact of JIT on IncomeImpact of JIT on IncomeImpact 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
Slide 5-31
Benefits of Variable Costing Benefits of Variable Costing for Internal Reportingfor Internal Reporting
Benefits of Variable Costing Benefits of Variable Costing for Internal Reportingfor 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
Slide 5-32
Benefits of Variable Costing Benefits of Variable Costing for Internal Reportingfor Internal Reporting
Benefits of Variable Costing Benefits of Variable Costing for Internal Reportingfor 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
Slide 5-33
Impact of Changes in SalesImpact of Changes in SalesImpact of Changes in SalesImpact of Changes in Sales
Learning objective 5: Discuss the benefits of variable costing for internal reporting purposes
Slide 5-34
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