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Copyright ©2015. University of North Florida. All rights reserved.
Variable and Full Costing
Managerial Accounting
Prepared by Diane TannerUniversity of North Florida
Chapter 3
Measuring Product Costs
Includes all costs necessary to get products ready to sell
Two methods to determine product costs Full (absorption) costing
Required for GAAP reportingEmphasizes the cost function
Variable costingUsed for internal decision makingEmphasizes cost behavior
2
Helps managers make product
decisions as it is easy to predict how costs will behave in
the future
Reporting Product Costs
• Merchandising companies– Buy goods to sell– Product costs reported
• Merchandise Inventory on the balance sheet • Cost of Goods Sold on the income statement
• Manufacturing companies– Buy materials to produce products to sell– Product costs reported
• Raw Materials, Work in Process, Finished Goods on the balance sheet
• Cost of Goods Sold on the income statement
3
4
Components of Product Costs
Inventoriable costs include Direct materials Direct labor Variable manufacturing overhead
costs Fixed manufacturing overhead costs
Full Costing
Variable Costing
Inventoriable costs include Direct materials Direct labor Variable manufacturing overhead
costs
5
Two Forms of Income Statements5
Gross margin is the amount available to cover operating expenses and to go
towards profit.
Full costing income statement Costs are reported based on function
Product versus period
Variable costing income statement Costs are reported based on behavior
Variable versus fixed
Contribution margin is the amount available to cover fixed costs and to go
towards profit.
GP Ratio vs. CM Ratio
Gross Profit (in $)
Sales (in $)Indicates the portion of every sales dollar available to cover operating costs and to go towards profit
Contribution Margin (in $)Sales (in $)
Indicates the portion of every sales dollar available to cover fixed costs and to go towards profit
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Interpretation
Interpretation
Expanded GAAP Income Statement7
Sales $100,000Cost of goods sold: Variable product costs $22,000 Fixed product costs 11,000Total cost of goods sold 33,000Gross margin (gross profit) 67,000Operating expenses:
Variable period costs 38,000Fixed period costs 19,000
Total operating expenses 57,000Net operating income $10,000
$67,000$100,000
Gross profitSales
= = 67.00%
Expanded Variable Costing Income Statement
8
Sales $100,000Variable costs: Variable product costs $22,000
Variable period costs 38,000Total variable costs 60,000Contribution margin 40,000Fixed expenses: Fixed product costs 11,000
Fixed period costs 19,000Total fixed expenses 30,000Net operating income $10,000
$40,000$100,000
Contribution MarginSales
= = 40.00%
9
The Contribution Approach
Consider the following information developed by the accountant at Element Skateboard Co:
Total Per Unit PercentSales (500 skateboards) 250,000$ 500$ 100%Variable expenses 150,000 300 60%Contribution margin 100,000$ 200$ 40%
Fixed expenses 80,000 Net operating income 20,000$
For each additional skateboard sold, profit will
increase by $200. Fixed costs in total do not change.
For each sales dollar generated by Element, profit will increase by $0.40. Fixed costs in total do not change.
CMR: = $200/$500 = 40%
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The End
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