Download - Nobles finmgr5 ppt_21
Chapter 21Variable Costing
© 2016 Pearson Education, Inc.
Learning Objectives
1. Distinguish between variable costing and absorption costing
2. Compute operating income using variable costing and absorption costing
21-2
© 2016 Pearson Education, Inc.
Learning Objectives
3. Use variable costing to make management decisions for a manufacturing business
4. Use variable costing to make management decisions for a service business
21-3
© 2016 Pearson Education, Inc.
Learning Objective 1
Distinguish between variable costing and absorption costing
21-4
© 2016 Pearson Education, Inc.
How Does Variable Costing Differ from Absorption Costing?
21-5
• Managerial accounting provides managers with information that is useful for internal decision making.
• The cost of producing products is estimated using one of two methods:– Absorption costing: Incudes all product costs.– Variable costing: Considers only variable
manufacturing costs.
© 2016 Pearson Education, Inc.
How Does Variable Costing Differ from Absorption Costing?
21-6
© 2016 Pearson Education, Inc.
Comparison of Unit Product Costs
21-7
© 2016 Pearson Education, Inc.
Comparison of Unit Product Costs
21-8
© 2016 Pearson Education, Inc.
Learning Objective 2
Compute operating income using variable costing and absorption costing
21-9
© 2016 Pearson Education, Inc.
How Does Operating Income Differ Between Variable Costing and
Absorption Costing?• Variable costing and absorption costing
will result in different operating income when:– Units produced are more than units sold and– Units produced are less than units sold
• The operating income result is the same under both methods when units produced equal units sold.
21-11
© 2016 Pearson Education, Inc.
Absorption Costing Variable Costing
Sales Sales
Less: Cost of Goods SoldDirect MaterialsDirect LaborVariable Manufacturing OverheadFixed Manufacturing Overhead
Less: Variable CostsDirect MaterialsDirect Labor Variable Manufacturing OverheadVariable Selling & Admin. Expenses
Gross Profit Contribution Margin
Less: Selling and Admin. ExpensesVariable Selling & Admin. ExpensesFixed Selling & Admin. Expenses
Less: Fixed CostsFixed Manufacturing OverheadFixed Selling & Admin. Expenses
Operating Income Operating Income
21-11
How Does Operating Income Differ Between Variable Costing and
Absorption Costing?Income statements for absorption costing and variable costing:
© 2016 Pearson Education, Inc.
Production Equals Sales
• Assume the following: – There is no beginning Finished Goods
Inventory.– Number of units produced is 2,000, and units
sold is also 2,000. – There is no ending Finished Goods Inventory
because all units were sold. • Operating income is the same under both
methods.
21-12
© 2016 Pearson Education, Inc. 21-13
Production Equals Sales
© 2016 Pearson Education, Inc.
Production Exceeds Sales
• Assume the following:– There is no beginning Finished Goods
Inventory.– Produced 2,500 tablet computers.– Sold 2,000 tablet computers.– 500 units are included in ending Finished
Goods Inventory. • Operating income under absorption
costing is greater than under variable costing.
21-14
© 2016 Pearson Education, Inc. 21-15
Production Exceeds Sales
© 2016 Pearson Education, Inc. 21-16
Production Exceeds Sales
© 2016 Pearson Education, Inc. 21-17
Production Exceeds Sales
© 2016 Pearson Education, Inc.
Production Is Less Than Sales
• Assume the following:– There are 500 units in beginning Finished
Goods Inventory.– Produced 1,500 tablet computers.– Sold 2,000 tablet computers.– Zero units in ending Finished Goods Inventory.
• Operating income under absorption costing is less than under variable costing.
21-18
© 2016 Pearson Education, Inc. 21-19
Production Is Less Than Sales
© 2016 Pearson Education, Inc. 21-20
Production Is Less Than Sales
© 2016 Pearson Education, Inc. 21-21
Production Is Less Than Sales
© 2016 Pearson Education, Inc. 21-22
Production Is Less Than Sales
© 2016 Pearson Education, Inc.
Learning Objective 3
Use variable costing to make management decisions for a manufacturing business
21-23
© 2016 Pearson Education, Inc.
How Can Variable Costing Be Used for Decision Making in a Manufacturing Company?
• For decision making, some cases should use variable costing, while other cases should use absorption costing.
• Manager decisions include: – Setting sales prices– Controlling costs– Planning production
21-24
© 2016 Pearson Education, Inc.
Analyzing Profitability
• Managers analyze profitability for products and segments. – Managers must determine which products to
sell. – Managers assess the success or failure of the
businesses segments. – Managers analyze the contribution margin per
unit and make decisions about the sales mix of its products.
21-25
© 2016 Pearson Education, Inc.
Products
21-26
© 2016 Pearson Education, Inc.
Business Segments
21-27
© 2016 Pearson Education, Inc.
Profitability Analysis
21-28
© 2016 Pearson Education, Inc.
Analyzing Contribution Margin
21-29
© 2016 Pearson Education, Inc. 21-30
Analyzing Contribution Margin
© 2016 Pearson Education, Inc. 21-31
Summary
© 2016 Pearson Education, Inc.
Learning Objective 4
Use variable costing to make management decisions for a service business
21-32
© 2016 Pearson Education, Inc.
How Can Variable Costing Be Used for Decision Making in a
Service Company?• Service companies provide services, rather
than products, to their customers. – No inventory or Cost of goods sold
• Variable costing can be used by services since they have both fixed and variable costs.
21-33
© 2016 Pearson Education, Inc.
Operating Income
21-34
© 2016 Pearson Education, Inc.
Profitability Analysis
21-35
© 2016 Pearson Education, Inc.
Contribution Margin Analysis
21-36
© 2016 Pearson Education, Inc. 21-37