Ch. 06: Variable Costing: A Tool for Management
Introduction:
Income is one of the most important measures used to evaluate the performance of
companies
‫يعتبر الربح من أهم المقاييس التي تستخدم لتقديم أداء المنشآت‬
Income Statement:
Sales revenue
(-) Cost of Goods Sold
(=) Gross Profit
Cost of Beginning Finished Inventory
(+) Cost of goods manufactured (Production * Cost per unit)
(-) Cost of ending finished goods inventory
(=) Cost of goods sold
Absorption Costing System
‫نظام التكاليف الكلية‬
Full Costing
Variable Costing System
‫نظام التكاليف المتغيرة‬
Direct Costing
Includes: All Manufacturing
Costs (V & F)
‫تتضمن جميع مصروفات التصنيع سواء‬
‫المتغيرة أو الثابتة‬
Includes: All variable
Manufacturing
Costs only
‫تتضمن جميع مصروفات التصنيع‬
‫المتغيرة فقط وتستبعد الثابتة‬
Required for external
reporting
Total
D.M
D.L
V.O.H
F.O.H
= Product Cost
$20,000
$10,000
$5,000
$5,000
$40,000
Beg Inventory = 10,000
Production = 10,000
Sales = 15,000
Price = $10
Per
Unit
$2.00
$1.00
$0.50
$0.50
$4.0
Required for decision
analyses (Internal users)
Which require a
separation of fixed and
variable costs
Total
D.M
D.L
V.O.H
= Product Cost
$20,000
$10,000
$5,000
0
$35,000
Per
Unit
$2.00
$1.00
$0.50
0
$3.5
Notes:
12345-
FOH per unit
Product cost per Unit
Ending inventory (units)
Cost of ending inventory
Cost of Goods Sold
Managerial accounting
= FOH / Production (units)
= Product costs / Production (units)
= Beginning inv (units) + Production (units) – Sales (units)
= Ending inventory * Product cost per unit
= Sales (units) * Product cost per unit
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Ehab Abdou 97672930
Ch. 06: Variable Costing: A Tool for Management
 The difference between two methods is in determining product cost per unit,
which affect in determining Cost of goods sold and Inventorable cost
 The difference in determining Product cost per unit between the two methods
is the fixed overhead per unit.
‫الفرق في تحديد تكلفة اإلنتاج ينشأ من معالجة التكاليف الصناعية اإلضافية الثابتة‬
Income Statement Under Absorption Costing System:
Sales Revenue
(-) Cost of Goods Sold
Cost of Beg F.G Inventory
(+) Cost of Goods Manufactured
(- ) Cost of End F.G Inventory
(=) Gross Profit [Margin]
(-) Selling and Administrative
Variable Selling & Administrative
150,000
[ Units Sold * Price Per Unit]
[ 15,000 units * $10 ]
[ Beg Inv (units) * Product cost / Unit ]
10,000 units * $2 (Last year)
[ Production (units) * Product cost/U]
10,000 units * $4 (current year)
[ End Inv (units) * Product Cost / U]
[ 5,000 units * $4 ] (current year)
20,000
40,000
-20,000
40,000
110,000
[ units sold * Variable S&A Per Unit]
[ 15,000 * $3 ]
Fixed Selling & Administrative
45,000
22,000
67,000
43,000
(=) Absorption Net Income
Income Statement Under Variable Costing System:
Sales Revenue
[ Units Sold
150,000
* Price Per Unit]
[ 15,000 units * $10 ]
(-) Total Variable Costs:
Variable Cost of Goods Sold
Cost of Beg F.G Inventory
[ Beg Inv (units) * Product cost / Unit ]
10,000 units
(+) Cost of Goods Manufactured
(- ) Cost of End F.G Inventory
Variable Selling & Admin.
(=) Total Contribution Margin
(-) Total Fixed Costs:
Fixed Manufacturing Overhead
Fixed Selling & Administrative
15,000
[ Production (units) * Product cost/U]
10,000 units * $3.5 (Current year)
[ End Inv (units) * Product Cost / U]
35,000
[ 5,000 units * $3.5 ] (Current year)
-17,500
[ Units Sold
32,500
45,000
72,500
* Variable S&A Per Unit]
5,000
22,000
27,000
45,500
(=) Variable Net Income
Managerial accounting
* $1.5 (Last year)
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Ehab Abdou 97672930
Ch. 06: Variable Costing: A Tool for Management
Difference in Net Income
= Change in Inventory * FOH Rate ( Per unit)
= (End Inv – Beg Inv ) * ( FOH / Production )
If Result is Positive (+) : ABS(NI) > VAR(NI)
If Result is Negative (-) : ABS(NI) < VAR(NI)
The Reconciliation of the variable and Absorption net income:
Variable Costing Net operating Income
Add: FOH Deferred in Inventory under ABS
(Increase in Inv * FOH Rate)
000
0
Less: FOH Released in Inventory Under ABS
( Decrease in Inv * FOH Rate)
(=) Absorption Costing Net operating Income
0000
Or we can make it as follows:
Variable Costing Net operating Income
Add: FOH (Deferred / Released )in Inventory
(End Inv – Beg Inv ) FOH Rate
(=) Absorption Costing Net operating Income
Important Note :
If there are :
Increase In Inventory
Or : End Inv > Beg Inv
Or : Production > Sales
ABS(NI) > VAR(NI)
Absorption
Variable
Costing
Costing
Direct Materials
Product
Costs
Product
Costs
Direct Labor
Variable Manufacturing Overhead
Fixed Manufacturing Overhead
Period
Costs
Variable Selling and Administrative Expenses
Period
Costs
Fixed Selling and Administrative Expenses
Managerial accounting
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Ehab Abdou 97672930
Ch. 06: Variable Costing: A Tool for Management
EXERCISE 6–7
Maxwell Company manufactures and sells a single product. The following costs were incurred
during the company’s first year of operations:
During the year, the company produced 20,000 units and sold 16,000 units. The selling price of the
company’s product is $50 per unit.
Required:
1. Compute the unit product cost under absorption costing and variable costing.
2. Prepare an income statement for the year under absorption costing and variable costing.
3. Compute the difference between net income under absorption costing and variable costing.
4. Reconcile the net income.
EXERCISE 6–3
High Tension Transformers, Inc., manufactures heavy-duty transformers for electrical switching
stations. The company uses variable costing for internal management reports and absorption costing
for external reports to shareholders, creditors, and the government. The company has provided the
following data:
The company’s fixed manufacturing overhead per unit was constant at $450 for all three years.
Required:
1. Determine each year’s absorption costing net operating income. Present your answer in the
form of a reconciliation report.
2. In Year 4, the company’s variable costing net operating income was $240,200 and its
absorption costing net operating income was $267,200. Did inventories increase or decrease
during Year 4? How much fixed manufacturing overhead cost was deferred or released from
inventory during Year 4?
PROBLEM 6–18
During Denton Company ’s first two years of operations, the company reported absorption costing
net operating income as follows:
Managerial accounting
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Ehab Abdou 97672930
Ch. 06: Variable Costing: A Tool for Management
The company’s $34 unit product cost is computed as follows:
Production and cost data for the two years are given below:
Required:
1. Prepare a variable costing contribution format income statement for each year.
2. Reconcile the absorption costing and variable costing net operating income figures for each
year.
Managerial accounting
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Ehab Abdou 97672930