Difference between Inventory Costing Methods:
Absorption Costing:
- product costs are capitalized; period costs are expensed.
- Absorption costing is a method of inventory costing in which all
variable manufacturing costs and all fixed manufacturing costs are
included as inventorial costs.
Variable Costing:
- Variable product and period costs are capitalized, fixed product and
period costs are expensed.
- Variable costing is a method of inventory costing in which only
variable manufacturing costs are included as inventorial costs.
Through put Costing :
only Direct Materials are capitalized; all other costs are expensed
Example:
Beginning Inventory units 0
Production units units 8,000
Sales units units 6,000
Ending Inventory units 2,000
Selling price per unit 1,000$
Variable direct material cost per unit 110$
Variable direct manufacturing labor cost per unit 40$
Variable direct manufacturing over head cost per unit 50$
Fixed Manufacturing Cost 1,080,000
Fixed Marketing Cost 1,380,000
Variable Marketing cost per unit 185$
Required: - Prepare income statement using variable costing.
-Prepare income statement using absorption costing.
Solution:
Items Absorption Variable
Revenues 6,000,000$ 6,000,000$
Sales units x Selling price per unit
6,000x 1000= 6,000,000$
Manufacturing cost: Variable + fixed Variable only
- Variable manufacturing cost 1,080,000 + 1,600,000 1,600,000
(200x 8000) =1,600,000
- Fixed Manufacturing Cost
- (135 x 8000)= 1,080,000
- Ending Inventory 2000 units Variable + fixed variable only
(135+200)x 2000= 670,000 200x2000=400,000
- Variable marketing cost (6,000 Added to fixed marketing Added to variable cost
x 185) =1,110,000$ cost of goods sold
- Total variable Manufacturing cost per unit= D. M + L +O.H (110+40+50)=200
-Variable Manufacturing cost= produced units x Total variable Manufacturing
cost per unit =8,000x 200= 1,600,000 $
-Fixed Manufacturing Cost per unit= total fixed manufacturing cost ÷
produced units = 1,080,000÷ 8,000 = 135$
-Variable marketing cost= sales units x Variable Marketing cost per unit
=6,000 x 185 =1,110,000$
1. Absorption Costing Income Statement
Revenues $6,000,000
Cost of goods sold:
Beginning inventory 0
+V. manufacturing cost 1,600,000
+F. manufacturing cost 1,080,000
Cost of goods available for sale 2,680,000
- Ending inventory(V+F) (670,000)
Total COGS 2,010,000
Gross margin 3,990,000
- [Link] cost (1,110,000)
- F. marketing cost (1,380,000)
Operating income $ 1,500,000
Manufacturing costs:
Cost of good sold 2,010,000
2. Variable Costing Income Statement
Revenues $6,000,000
Variable Cost of goods sold:
Beginning Inventory 0
+ [Link]. cost 1,600,000
Cost of goods available for sale 1,600,000
Ending Inventory (400,000)
Total variable cost of good sold (1,200,000)
[Link] cost (1,110,000)
Contribution margin 3,690,000
- Fixed expenses:
[Link] cost (1,080,000)
[Link] cost (1,380,000)
Operating income $ 1,230,000
Manufacturing costs:
V. cost of goods sold 1,200,000
F. manufacturing costs 1,080,000
Total 2,280,000