13-1
Standard Costing,
Variable Costing,
and Throughput
Costing
Prepared by
Douglas Cloud
Pepperdine University
13-2
Objectives
 Describe standard costing and explain why it is
After
reading
this
the predominant
costing
method.
chapter, you should
 Develop standard fixed overhead rates and
be able to:
apply fixed overhead to products.
 Prepare standard absorption costing income
statement.
 Compare, contrast, and distinguish actual,
normal, and standard costing.
Continued
13-3
Objectives
 Explain why variable costing offers
advantages over absorption costing for internal
reporting purposes.
 Prepare variable costing income statements.
 Describe throughput costing and prepare
income statements.
13-4
Standard Absorption Costing
Under standard costing inventories
appear at standard cost, not actual or
normal cost.
13-5
Standard Absorption Costing
An important reason for using
standard costing is that it integrates
standard costs and variances into the
company’s record.
13-6
SMP Company, Operating Data 20X1
Production in units
Sales in units, at $80 each
Ending inventory in units
Actual production costs:
Variable
Fixed
Selling and administrative expenses:
Variable at $5 per unit
Fixed
Standards and budgets:
Budgeted fixed production costs
Standard variable production costs
110,000
90,000
20,000
$2,255,000
$3,200,000
$450,000
$1,400,000
$3,000,000
$20 per unit
13-7
Calculating A Standard Fixed Cost
The standard fixed cost per unit depends on two
things:
(1) The choice of a measure of activity (e.g.,
direct labor hours, machine hours, setup time
etc.).
(2) A level of activity.
13-8
Calculating A Standard Fixed Cost
Normal activity is the
Theoretical activity
average activity
is the absolute
expected or budgeted
Practical activity
is
maximum
that a
over the coming two
the maximum
plant can produce,
to five years.
activity the company
with no interruptions
can achieve given
or problems at all.
the usual kinds of
interruptions.
13-9
Calculating A Standard Fixed Cost
SMP’s management decides to set the standard perunit fixed cost using normal capacity of 100,000 units.
Budgeted fixed production costs
Standard fixed
=
cost per unit
Level of activity
=
=
$3,000,000
100,000
$30 per unit
13-10
Variances
Total actual variable production
cost (for source of data, turn
click on button below)
Standard variable costs
(110,000 x $20)
Unfavorable variable cost variances
$2,255,000
2,200,000
$
55,000
13-11
Variances
Total actual fixed overhead
$3,200,000
Fixed overhead applied
(110,000 x $30)
3,300,000
Overapplied overhead
$ 100,000
13-12
Variances
Budgeted
fixed
overhead
Actual fixed
overhead
$3,200,000
Applied
fixed
overhead
$3,000,000
$3,300,000
(110,000 x $30)
$300,000 F
$200,000 U
Budget variance
Volume variance
$100,000 F
Overapplied overhead
13-13
SMP Company, Fixed Overhead, 20X1
Applied at 110,000 units
$3,300,000
$3,200,000
Volume Variance
$300,000 F
Budget variance, $200,000 U
$3,000,000
Dollars
Budget Variance
$200,000 U
Budget
Actual
$3,200,000
Applied, $30 x units produced
100,000
Production in Units
110,000
13-14
SMP Company, Income
Statement for 20X1
Sales
Standard cost of sales:
Beginning inventory
Standard variable production costs
Applied fixed production costs
Cost of goods available for sale
Ending inventory
Standard cost of sales
Standard gross margin
Continued
$7,200,000
$
0
2,200,000
3,300,000
$5,500,000
1,000,000
4,500,000
$2,700,000
13-15
Standard gross margin
$2,700,000
Variances:
Fixed manufacturing cost budget
variance
$200,000 U
Fixed manufacturing cost volume
variance
300,000 F
Variable manufacturing cost variance
55,000 U
45,000 F
Actual gross margin
$2,745,000
Selling and administrative expenses
1,850,000
Profit
$ 895,000
13-16
SMP Company, Income
Statement for 20X1
Sales
Cost of sales:
Standard cost of sales
Variances:
Fixed manufacturing cost budget variance
Fixed manufacturing cost volume variance
Variable manufacturing cost variances
Cost of sales
Gross margin
Selling and administrative expenses
Profit
$7,200,000
$4,500,000
Alternative Format
200,000 U
300,000 F
55,000 U
4,455,000
$2,745,000
1,850,000
$ 895,000
13-17
Review Problem
SMP, 20X1
Production, in units
Sales, in units, at $80 each
Ending inventory, in units
Actual production costs:
Variable
Fixed
Selling and administrative expenses:
Variable at $5 per unit
Fixed
Standard variable production cost (per unit)
Budgeted fixed production costs
95,000
100,000
15,000
$1,881,000
$2,950,000
$ 500,000
$1,400,000
$20
$3,000,000
13-18
SMP Company, Income
Statement for 20X1
Sales
$8,000,000
Standard cost of sales:
Beginning inventory
$1,000,000
Standard variable production costs
1,900,000
Applied fixed production costs
2,850,000
Cost of goods available for sale
$5,750,000
Ending inventory
750,000
Standard cost of sales
$5,000,000
Variances:
Fixed mfg. cost budget variance
50,000 F
Fixed mfg. cost volume variance
150,000 U
Continued
Variable mfg. cost variances
19,000 F
13-19
Sales (100,000 x $80)
Cost of sales
Gross margin
Selling and administrative expenses
Profit
$8,000,000
5,081,000
$2,919,000
1,900,000
$1,019,000
Variances:
Variable cost: $1,881,000 – ($20 x 95,000) =
$19,000 F
13-20
SMP Company Example
Actual fixed
overhead
Budgeted
fixed
overhead
Applied
fixed
overhead
$2,950,000
$3,000,000
( 95,000 x $30)
$2,850,000
$150,000 U
$50,000 F
Budget variance
Volume variance
$100,000
Total fixed overhead variances
13-21
Multiple Products and
Activity-Based Costing
ARG Company
Portable Model
Standard direct labor hours
Number of component parts
Budgeted production
Total budgeted use of
components
Table Model
8
100
6,000
12
200
2,000
600,000
400,000
Standard fixed overhead rate per component
($500,000/(600,000 + 400,000) = $0.50
13-22
Multiple Products and
Activity-Based Costing
ARG Company
Portable Model
Material related:
Portable model ($100 x $0.50)
Table model (200 x $0.50)
Direct labor-related:
Portable model (8 hours x $4)
Table model (12 hours x $4)
Standard fixed overhead cost
per unit
Table Model
$50
$100
32
48
$82
$148
13-23
ARG Company Example
Actual Cost
Budgeted
Cost
$510,000
$500,000
Applied
Cost
$550,000
$50,000 F
$10,000 U
Budget variance
Volume variance
$40,000
Total overapplied overhead
13-24
Comparison of Standard and
Normal Costing
Manufacturing Costs
Direct
Materials
Direct
Labor
Overhead
Actual cost system
Actual
Actual
Actual
Normal cost system
Actual
Actual
Applied
Standard cost system
Standard
Standard
Standard
13-25
Variable Costing
Variable costing
excludes fixed
production costs from
the unit costs of
inventories, and treats all
fixed costs as expenses
in the period incurred.
13-26
Flow of Costs in a Manufacturing Firm
Materials
Inventory
Direct
Labor
Variable
Manufacturing
Overhead
Fixed
Manufacturing
Overhead
Work in
Process
Inventory
Finished
Goods
Inventory
Cost of
Goods
Sold on
income
statement
Absorption
costing
Expense
on income
statement
13-27
SMP Company, Income Statement for
20X1—Actual Variable Costing
Sales
$7,200,000
Variable cost of sales:
Beginning inventory
$
0
Actual variable production costs
2,255,000
Cost of goods available for sale
$2,255,000
Ending inventory
410,000
Variable cost of sales
1,845,000
Variable manufacturing margin
$5,355,000
Variable selling and administrative exp.
450,000
Contribution margin
$4,905,000
Actual fixed costs
4,600,000
Profit
$ 305,000
13-28
SMP Company, Income Statement for
20X2—Actual Variable Costing
Sales
$8,000,000
Variable cost of sales:
Beginning inventory
$ 410,000
Actual variable production costs
1,881,000
Cost of goods available for sale
$2,291,000
Ending inventory
297,000
Variable cost of sales
1,994,000
Variable manufacturing margin
$6,006,000
Variable selling and administrative exp.
500,000
Contribution margin
$5,506,000
Actual fixed costs
4,350,000
Profit
$ 1,156,000
13-29
SMP Company, Standard Variable
Costing Income Statement for 20x2
Sales
Variable standard cost of goods sold
Standard variable manufacturing margin
Variable manufacturing cost variances
Variable manufacturing margin
Variable selling and administrative
Contribution margin
Actual fixed costs:
Budgeted fixed mfg. costs
Fixed mfg. cost budget variance
Selling and administrative
Profit
$8,000,000
2,000,000
$6,000,000
19,000 F
$6,019,000
500,000
$5,519,000
$3,000,000
$50,000 F
1,400,000
4,350,000
$1,169,000
13-30
Reconciliation of Incomes—Variable
and Absorption Costing
Variable costing net income
Absorption costing net income
Difference to be explained
Explanation of income differences:
Fixed production costs-beg. inventory
Fixed production costs during year
Less fixed production costs-end. inventory
Total fixed costs expensed—absorption costing
Total fixed costs expensed—variable costing
Difference in incomes
20x1
20x2
$ 295,000 $1,169,000
895,000
1,019,000
$ (600,000 ) $ 150,000
$
0
3,200,000
$3,200,000
600,000
$2,600,000
3,200,000
$ (600,000 )
$ 600,000
2,950,000
$3,550,000
450,000
$3,100,000
2,950,000
$ 150,000
13-31
Throughput Costing
 An extreme form of variable costing which
follows the principles of the Theory of
Constraints.
 It is a radical departure from other methods in
that it treats all costs except unused materials as
expenses.
 It does not record work in process or finished
goods inventories.
 It treats all direct labor and manufacturing
overhead costs as period costs expensing them as
they are incurred.
13-32
Income Statement Comparison
Absorption
Costing
Sales
Variable Throughput
Costing
Costing
$180,000 $180,000 $180,000
Cost of sales
90,000
63,000
50,000
Gross margin
90,000
117,000
130,000
30,000
50,000
Other expenses:
Other mfg. costs
Selling and admin.
15,000
15,000
15,000
Total other expenses
15,000
45,000
65,000
Income
$ 75,000 $ 72,000 $ 65,000
13-33
Chapter 13
The End
13-34
13-35
SMP Company, Operating Data 20X1
Production in ;units
Sales in units, at $80 each
Ending inventory in units
Actual production costs:
Variable
Fixed
Selling and administrative expenses:
Variable at $5 per unit
Fixed
Standards and budgets:
Budgeted fixed production costs
Standard variable production costs
Return to Slide 13-10
110,000
90,000
20,000
$2,255,000
$3,200,000
$450,000
$1,400,000
$3,000,000
$20 per unit