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7
Variable Costing:
A Tool for Management
7-2
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Explain how variable costing differs from
absorption costing and compute the unit
product cost under each method.
2. Describe how fixed manufacturing overhead
costs are deferred in inventory and released
from inventory under absorption costing.
3. Prepare income statements using both
variable and absorption costing, and reconcile
the two net income figures.
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
4. Explain the effect of changes in production on
the net income reported under both variable
and absorption costing.
5. Explain the advantages and limitations of both
the variable and absorption costing methods.
6. Explain how the use of JIT reduces the
difference in net income reported under the
variable and absorption costing methods.
Variable
Costing
Absorption
Costing
Variable
Costing
Absorption Variable
Costing Costing
Direct materials
Direct labour Product costs
Product costs Variable mfg. overhead
Variable costing
Variable mfg. costs $ 200,000 $ 50,000
Fix ed mfg. costs - -
$ 200,000 $ 50,000
Variable costing
Variable mfg. costs $ 200,000 $ 50,000 $ - $ 250,000
Fix ed mfg. costs - - 150,000 150,000
$ 200,000 $ 50,000 $ 150,000 $ 400,000
Reconciliation
No change in Harveys
cost structure.
Summary
Income Comparison
Summary
Rela tion betwe en Effect Rela tion betwe en
production on variable and
Ye ar and sa les inive ntory absorption income
Inve ntory Absorption
1st Production > Sales increa ses by >
year 25,000 > 20,000 5,000 units. Variable
Inve ntory Absorption
2nd Production < Sales de crea ses <
year 25,000 < 30,000 to ze ro. Variable
Both Absorption
years Production = Sales No cha nge =
combine d 50,000 = 50,000 Variable
Absorption Variable
Costing Costing
McGraw-Hill Ryerson Limited., 2001
7-29
Absorption Variable
Costing Costing
McGraw-Hill Ryerson Limited., 2001
7-30
I guess we wont be
solving this controversy
today!
Production
tends to equal
sales . . .
End of Chapter 7