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Learning Objective 1
McGraw-Hill/Irwin
Absorption Costing
A system of accounting for costs in which both fixed and variable production costs are considered product costs.
Fixed Costs Product Variable Costs
Variable Costing
A system of cost accounting that only assigns the variable cost of production to products.
Fixed Costs Product Variable Costs
Product costs
Product costs
Product costs
Product costs
The difference between absorption and variable costing is the treatment of fixed manufacturing overhead.
Learning Objective 2
McGraw-Hill/Irwin
$ $
10 3
$ 150,000 $ 100,000
Selling and administrative expenses are always treated as period expenses and deducted from revenue.
320,000 $ 280,000
320,000 $ 280,000
160,000 $ 120,000
Learning Objective 3
McGraw-Hill/Irwin
$ 150,000 100,000
250,000 $ 90,000
$ 50,000 $ 50,000
150,000 $ 150,000
$ 50,000 $ 50,000
150,000 $ 150,000
Learning Objective 4
McGraw-Hill/Irwin
30,000 120,000
Learning Objective 5
McGraw-Hill/Irwin
$ $
10 3
$ 150,000 $ 100,000
480,000 $ 420,000
$ 90,000 100,000
190,000 $ 230,000
480,000 $ 420,000
$ 90,000 100,000
190,000 $ 230,000
$ 150,000 100,000
250,000 $ 260,000
Summary
Income Comparison
Costing Method Absorption Variable 1st Period $ 120,000 90,000 2nd Period $ 230,000 260,000 Total $ 350,000 350,000
In the first period, production (25,000 units) was greater than sales (20,000). In the second period, production (25,000 units) was less than sales (30,000).
Learning Objective 6
McGraw-Hill/Irwin
Summary
Income Comparison
Costing Method Absorption Variable 1st Period $ 120,000 90,000 2nd Period $ 230,000 260,000 Total $ 350,000 350,000
For the two-year period, total absorption income and total variable income are the same.
Summary
Lets see if we can get an overview of what we have done.
Increase
AC > VC
Fixed mfg. This was the case in the first period Fixed mfg. when production Produced < Sold Decrease costs expensed > costs expensed AC < VC of 25,000 units was greater than sales of 20,000 units. AC VC Fixed zero Fixed units and Inventory increased frommfg. to 5,000mfg. Produced = Sold No change costs expensed = costs expensed AC = $120,000 absorption income was greater than AC VC $90,000 variable income.
VC
Increase
AC > VC
Decrease
AC < VC
Fixed mfg. Fixed mfg. In the second period sales of 30,000 units Produced = Sold No change costs expensed = costs expensed AC were greater than production of 25,000. AC VC
= VC
Increase
AC > VC
Decrease
AC < VC
Fixed mfg. Fixed mfg. Inventory decreased from 5,000 units to zero, Produced = Sold No change costs expensed = costs expensed AC = VC and $230,000 absorption income was less AC VC than $260,000 variable income.
Period Expense Effect Fixed mfg. costs expensed AC Fixed mfg. < costs expensed VC
Profit Effect
Increase
AC > VC
Fixed mfg. For the two-year period, unitsFixed mfg. produced Produced < Sold Decrease equals units sold, costs expensed > costs expensed AC < so total absorption income AC VC equals total variable income. Produced = Sold No change Fixed mfg. Fixed mfg. costs expensed = costs expensed AC VC
VC
AC = VC
Cost-VolumeCost-Volume-Profit Analysis
CVP includes all fixed costs to compute breakeven.
Variable costing and CVP are consistent as both treat fixed costs as a lump sum.
Advantages
Advantages
Consistent with long-run longpricing decisions that must cover full cost.
So, the difference between variable and absorption income tends to disappear.
Learning Objective 7
McGraw-Hill/Irwin
Throughput Costing
Unit-level spending for direct costs. Product cost
Unit-level costs are incurred every time a unit of product is manufactured and will not be incurred again until the next unit is manufactured.
Throughput Costing
Example In an automated process direct material may be the only unit-level cost and so is the only product cost. All other manufacturing costs are expensed as period costs. Incentive to overproduce is reduced Average unit cost does not vary with changes in production levels.
Advantages
Learning Objective 8
McGraw-Hill/Irwin
375,000 $ 75,000
Learning Objective 9
McGraw-Hill/Irwin
Volume Variances
Variable-costing statement has no volume variance Absorption-costing income statement has volume variance because fixed overhead costs are included in the cost of the product.
End of Chapter 17
The End