Absorption Costing vs. Variable Costing
[Pages:11]Absorption Costing vs.
Variable Costing
Absorption S
CGS GP S&A NIABS
1
Variable S VC CM FC NIVC
2
Overview of Absorption and Variable Costing
Absorption Costing
DM
Product Costs
DL VMOH
Period Costs
VS&A FS&A
DM DL VMOH
FMOH
VS&A FS&A
Variable Costing
Product Costs
Period Costs
3
Unit Cost Computations
Harvey Company produces a single product with the following information available:
4
Unit Cost Computations
Unit product cost is determined as follows:
Under absorption costing, S&A expenses are always treated as period expenses and deducted from revenue as incurred.
5
Income Comparison of Absorption and Variable Costing
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 were no units in beginning inventory.
Now, let's compute net operating income using both absorption and variable costing.
6
Absorption Costing
7
Variable Costing
Variable
Sales (20,000 ? $30)
manufacturing costs only.
Variable Costing
$ 600,000
Less variable expenses:
Beginning inventory
$ -
Add COGM (25,000 ? $10)
250,000
Goods available for sale
250,000
Less ending inventory (5,000 ? $10) 50,000
Variable cost of goods sold
200,000
All fixed manufacturing
overhead is expensed.
Variable selling & administrative
expenses (20,000 ? $3)
60,000
260,000
Contribution margin
340,000
Less fixed expenses:
Manufacturing overhead
$ 150,000
Selling & administrative expenses 100,000
250,000
Net operating income
$ 90,000
8
Comparing the Two Methods
9
Comparing the Two Methods
We can reconcile the difference between absorption and variable income as follows:
Variable costing net operating income $ 90,000
Add: FMOH deferred in inventory
(5,000 units ? $6 per unit)
30,000
Absorption costing net operating income $ 120,000
FMOH Units produced
=
$150,000 25,000 units
=
$6.00 per unit
10
Extended Comparisons of Income Data Harvey Company Year Two
11
Unit Cost Computations
Since there was no change in the variable costs per unit, total fixed costs, or the number of
units produced, the unit costs remain unchanged.
12
Absorption Costing
Sales (30,000 ? $30) Less cost of goods sold:
Beg. inventory (5,000 ? $16) Add COGM (25,000 ? $16) Goods available for sale Less ending inventory Gross margin Less selling & admin. exp. Variable (30,000 ? $3) Fixed Net operating income
Absorption Costing
$ 900,000
$ 80,000 400,000 480,000 -
480,000 420,000
$ 90,000 100,000
190,000 $ 230,000
These are the 25,000 units produced in the current period.
13
Variable Costing
Variable manufacturing
costs only.
All fixed manufacturing
overhead is expensed.
14
Comparing the Two Methods
We can reconcile the difference between absorption and variable income as follows:
Variable costing net operating income $ 260,000
Deduct: FMOH costs released from
inventory (5,000 units ? $6 per unit)
30,000
Absorption costing net operating income $ 230,000
FMOH Units produced
=
$150,000 25,000 units
=
$6.00 per unit
15
Comparing the Two Methods
16
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