Chapter SixVariable Costing:A Tool for Management7-2Learning Objective 1Explain how variable Explain how variable costing differs from costing differs from absorption costing and absorption costing and compute unit product compute unit product costs under each method.costs under each method.7-3Overview of Absorptionan Variable CostingDirect MaterialsDirect LaborVariable Manufacturing OverheadFixed Manufacturing OverheadVariable Selling and Administrative ExpensesFixed Selling and Administrative ExpensesVariableCostingAbsorptionCosting!ro"ctCosts!erioCosts!ro"ctCosts!erioCosts7-4#"ic$ Chec$ Which method ill produce the highest values for or! in process and finished goods inventories" a%Absorption costing#b%Variable costing#c%$he% produce the same values for theseinventories#%&t depends# # #7-5 Which method ill produce the highest values for or! in process and finished goods inventories" a%Absorption costing#b%Variable costing#c%$he% produce the same values for theseinventories#%&t depends# # ##"ic$ Chec$ 7-6'arve% (ompan% produces a single productith the folloing information available)Number of units produced annually 25,000 Variable costs per unit:Direct materials, direct labor, and ariable mf!" oer#ead $0 % &ellin! ' administratie e(penses 3 % )i(ed costs per year:*anufacturin! oer#ead $50,000 % &ellin! ' administratie e(penses $00,000 % &nit Cost Comp"tations7-7&nit pro"ct cost is etermine as follows: +bsorption ,ostin! Variable ,ostin!Direct materials, direct labor, and ariable mf!" oer#ead $0 % $0 %)i(ed mf!" oer#ead -%$50,000 . 25,000 units/ 6 - 0nit product cost $6 % $0 %&nit Cost Comp"tations7-1Learning Objective 'Prepare income Prepare income statements using both statements using both variable and absorption variable and absorption costing.costing.7-2(ncome Comparison ofAbsorption an Variable CostingLet*s assume the folloing additional information for 'arve% (ompan%#+,-,,, units ere sold during the %ear at a price of ./, each#$here ere no units in beginning inventor%#0o- let*s compute net operatingincome using both absorptionand variable costing#7-$0+bsorption ,ostin!&ales -20,000 3 %30/ 600,000 % 4ess cost of !oods sold: 5e!innin! inentory - % +dd ,67* -25,000 3 %$6/ 400,000 7oods aailable for sale 400,000 8ndin! inentory -5,000 3 %$6/ 10,000 320,000 7ross mar!in 210,000 4ess sellin! ' admin" e(p" Variable -20,000 3 %3/ 60,000 % )i(ed $00,000 $60,000 Net operatin! income $20,000 % Absorption Costing7-$$Variable ,ostin!&ales -20,000 3 %30/ 600,000 % 4ess ariable e(penses: 5e!innin! inentory - % +dd ,67* -25,000 3 %$0/ 250,000 7oods aailable for sale 250,000 4ess endin! inentory -5,000 3 %$0/ 50,000 Variable cost of !oods sold 200,000 Variable sellin! ' administratie e(penses -20,000 3 %3/ 60,000260,000 ,ontribution mar!in 340,000 4ess fi(ed e(penses: *anufacturin! oer#ead $50,000 % &ellin! ' administratie e(penses $00,000250,000 Net operatin! income 20,000 % Variablemanufacturin! costs only"+ll fi(edmanufacturin!oer#ead ise(pensed"Variable Costing7-$2Learning Objective )Reconcile variable costing Reconcile variable costing and absorption costing net and absorption costing net operating incomes and operating incomes and explain why the two explain why the two amounts differ.amounts differ.7-$3Comparing the Two Methos7-$4*ixe mfg% Overhea+1,-.--- &nits pro"ce',.--- "nits/ / +0%-- per "nit1e can reconcile the ifference betweenabsorption an variable income as follows:Comparing the Two Methos7-$52xtene Comparisons of (ncome 3ata 4arve5 Compan5 6ear Two7-$6&nit Cost Comp"tationsSince there as no change in the variable costsper unit- total fixed costs- or the number ofunits produced- the unit costs remain unchanged#7-$7Absorption CostingThese are the ',.--- "nitspro"ce in the c"rrent perio%7-$1Variable ,ostin!&ales -30,000 3 %30/ 200,000 % 4ess ariable e(penses: 5e!" inentory -5,000 3 %$0/ 50,000 % +dd ,67* -25,000 3 %$0/ 250,000 7oods aailable for sale 300,000 4ess endin! inentory - Variable cost of !oods sold 300,000 Variable sellin! ' administratie e(penses -30,000 3 %3/ 20,000320,000 ,ontribution mar!in 5$0,000 4ess fi(ed e(penses: *anufacturin! oer#ead $50,000 % &ellin! ' administratie e(penses $00,000250,000 Net operatin! income 260,000 % Variable Costing+ll fi(edmanufacturin!oer#ead ise(pensed"Variablemanufacturin! costs only"7-$2Variable costin! net operatin! income 260,000 %Deduct: )i(ed manufacturin! oer#ead costs released from inentory -5,000 units 3 %6 per unit/30,000 +bsorption costin! net operatin! income 230,000 %1e can reconcile the ifference betweenabsorption an variable income as follows:*ixe mfg% Overhea +1,-.--- &nits pro"ce ',.--- "nits// +0%-- per "nitComparing the Two Methos7-20,ostin! *et#od $st 9eriod 2nd 9eriod :otal+bsorption $20,000 %230,000 %350,000 % Variable 20,000 260,000350,000 Comparing the Two Methos7-2$S"mmar5 of 7e5 (nsights7-222ffect of Changes in !ro"ctionon 8et Operating (ncomeLet*s revise the 'arve% (ompan% example#&n the previous example-+1-,,, units ere produced each %ear-but sales increased from +,-,,, units in %earone to /,-,,, units in %ear to#&n this revised example-production ill differ each %ear hilesales ill remain constant#7-232ffect of Changes in !ro"ction4arve5 Compan5 6ear OneNumber of units produced 30,000 Number of units sold 25,000 0nit sales price 30 % Variable costs per unit:Direct materials, direct labor ariable mf!" oer#ead $0 % &ellin! ' administratie e(penses 3 % )i(ed costs per year:*anufacturin! oer#ead $50,000 % &ellin! ' administratie e(penses $00,000 % 7-24&nit pro"ct cost is etermine as follows: +bsorption ,ostin! Variable ,ostin!Direct materials, direct labor, and ariable mf!" oer#ead $0 % $0 %)i(ed mf!" oer#ead -%$50,000 . 30,000 units/ 5 - 0nit product cost $5 % $0 %&nit Cost Comp"tations for 6ear OneSince the number of units produced increasedin this example- hile the fixed manufacturing overheadremained the same- the absorption unit cost is less#Since the number of units produced increasedin this example- hile the fixed manufacturing overheadremained the same- the absorption unit cost is less#7-25+bsorption ,ostin!&ales -25,000 3 %30/ 750,000 % 4ess cost of !oods sold: 5e!innin! inentory - % +dd ,67* -30,000 3 %$5/ 450,000 7oods aailable for sale 450,000 8ndin! inentory -5,000 3 %$5/ 75,000 375,000 7ross mar!in 375,000 4ess sellin! ' admin" e(p" Variable -25,000 3 %3/ 75,000 % )i(ed $00,000$75,000 Net operatin! income 200,000 % Absorption Costing:6ear One7-26Variable ,ostin!&ales -25,000 3 %30/ 750,000 % 4ess ariable e(penses: 5e!innin! inentory - % +dd ,67* -30,000 3 %$0/ 300,000 7oods aailable for sale 300,000 4ess endin! inentory -5,000 3 %$0/ 50,000 Variable cost of !oods sold 250,000 Variable sellin! ' administratie e(penses -25,000 3 %3/ 75,000325,000 ,ontribution mar!in 425,000 4ess fi(ed e(penses: *anufacturin! oer#ead $50,000 % &ellin! ' administratie e(penses $00,000250,000 Net operatin! income $75,000 % Variable Costing:6ear OneVariablemanufacturin! costs only"+ll fi(edmanufacturin!oer#ead ise(pensed"7-27Number of units produced 20,000 Number of units sold 25,000 0nits in be!innin! inentory 5,0000nit sales price 30 % Variable costs per unit:Direct materials, direct labor ariable mf!" oer#ead $0 % &ellin! ' administratie e(penses 3 % )i(ed costs per year:*anufacturin! oer#ead $50,000 % &ellin! ' administratie e(penses $00,000 % 2ffect of Changes in !ro"ction4arve5 Compan5 6ear Two7-21&nit pro"ct cost is etermine as follows: +bsorption ,ostin! Variable ,ostin!Direct materials, direct labor, and ariable mf!" oer#ead $0 % $0 %)i(ed mf!" oer#ead -%$50,000 . 20,000 units/ 7"50- 0nit product cost $7"50 % $0 %&nit Cost Comp"tations for 6ear TwoSince the number of units produced decreased in thesecond %ear- hile the fixed manufacturing overheadremained the same- the absorption unit cost is no higher#7-22+bsorption ,ostin!&ales -25,000 3 %30/ 750,000 % 4ess cost of !oods sold: 5e!" inentory -5,000 3 %$5/ 75,000 % +dd ,67* -20,000 3 %$7"50/ 350,000 7oods aailable for sale 425,000 4ess endin! inentory - 425,000 7ross mar!in 325,000 4ess sellin! ' admin" e(p" Variable -25,000 3 %3/ 75,000 % )i(ed $00,000$75,000 Net operatin! income $50,000 % Absorption Costing:6ear TwoThese are the '-.--- "nits pro"ce in the c"rrentperio at the higher "nit cost of +19%,- each%7-30Variable ,ostin!&ales -25,000 3 %30/ 750,000 % 4ess ariable e(penses: 5e!" inentory -5,000 3 %$0/ 50,000 % +dd ,67* -20,000 3 %$0/ 200,000 7oods aailable for sale 250,000 4ess endin! inentory - Variable cost of !oods sold 250,000 Variable sellin! ' administratie e(penses -25,000 3 %3/ 75,000325,000 ,ontribution mar!in 425,000 4ess fi(ed e(penses: *anufacturin! oer#ead $50,000 % &ellin! ' administratie e(penses $00,000250,000 Net operatin! income $75,000 % Variable Costing:6ear Two+ll fi(edmanufacturin!oer#ead ise(pensed"Variablemanufacturin! costs only"7-3$,ostin! *et#od ;ear 6ne ;ear :