Chapter 3
Managerial Accounting
Variable and Full
Costing
Prepared by Diane Tanner
University of North Florida
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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 reporting
 Emphasizes the cost function
 Variable costing
Helps managers
make product
decisions as it is
easy to predict how
costs will behave in
the future
 Used for internal decision making
 Emphasizes cost behavior
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
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Components of Product Costs
Full
Costing
 Inventoriable costs include
 Direct materials
 Direct labor
 Variable manufacturing overhead
costs
 Fixed manufacturing overhead costs
 Inventoriable costs include
Variable
Costing
 Direct materials
 Direct labor
 Variable manufacturing overhead
costs
Two Forms of Income Statements
 Full costing income statement
 Costs are reported based on function
 Product versus period
Gross margin is the amount available
to cover operating expenses and to go
towards profit.
 Variable costing income statement
 Costs are reported based on behavior
 Variable versus fixed
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Contribution margin is the amount
available to cover fixed costs and to go
towards profit.
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GP Ratio vs. CM Ratio
Contribution Margin (in $)
Sales (in $)
Interpretation
Indicates the portion of every sales dollar available
to cover fixed costs and to go towards profit
Gross Profit (in $)
Sales (in $)
Interpretation
Indicates the portion of every sales dollar available
to cover operating costs and to go towards profit
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Expanded GAAP Income Statement
Sales
Cost of goods sold:
Variable product costs
Fixed product costs
Total cost of goods sold
Gross margin (gross profit)
Operating expenses:
Variable period costs
Fixed period costs
Total operating expenses
Net operating income
Gross profit
=
Sales
$100,000
$22,000
11,000
33,000
67,000
38,000
19,000
$67,000
$100,000
57,000
$10,000
= 67.00%
Expanded Variable Costing
Income Statement
Sales
Variable costs:
Variable product costs
Variable period costs
Total variable costs
Contribution margin
Fixed expenses:
Fixed product costs
Fixed period costs
Total fixed expenses
Net operating income
Contribution Margin
Sales
=
$100,000
$22,000
38,000
60,000
40,000
11,000
19,000
30,000
$10,000
$40,000
$100,000
= 40.00%
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The Contribution Approach
Consider the following information developed by the
accountant at Element Skateboard Co:
Sales (500 skateboards)
Variable expenses
Contribution margin
Fixed expenses
Net operating income
Total
$ 250,000
150,000
$ 100,000
80,000
$ 20,000
Per Unit
$
500
300
$
200
Percen
100
60
40
CMR: = $200/$500 = 40%
For each sales dollar
generated by Element, profit
will increase by $0.40. Fixed
costs in total do not change.
For each additional
skateboard sold, profit will
increase by $200. Fixed costs
in total do not change.
The End
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