Variable Costing

BONG
 CLASSIFICATION OF COSTS UNDER
VARIABLE AND ABSORPTION COSTING

Cost
Balance Shet
Raw materials Raw Materials inventory
purchases
Direct materias
sed in production
Direct labor Work in Process imventory

Varlable Goods completed,

(cost ofgoods
manufacturing manutactured) IncomeStatement
overhead
Finished Goods inventory Cost of Goods Sold
Goods
Fixed sold
manufacturing
overhead
Variable
costing

Selling and Period Expenses

administrative
 Overview of Absorption and Variable
Costing

Absorption Variable
Costing Costing
Direct Materials

Product
Direct Labor
Product ICosts
Costs) Variable Manufacturing Overhead

Fixed Manufacturing Overhead

Period
Period Variable Selling and Administrative Expenses
Costs
Costs Fixed Selling and Administrative Expenses
 Unit Cost Computations

Hyla Company produces a single product with

the following information available:
Number of units produced annually 25,000
Variable costs per unit:
Direct materials, direct labor,
and mfg. overhead
variable P10.00
Selling & administrative expenses 3.00

Fixed costs per year:

Manufacturing overhead 150,000.00
Selling & administrative expenses 100,000.00
 Unit Cost Computations
Unit iuct c is determined as follows:

Absorption Variable
Costing Costing
Direct materials, direct labor,
and variable mfg. overhead P10.00 P10.00
Fixed mfg. overhead
($150,000 25,000 units) 6
Unit product cost P16.00 P10.00

Selling and administrative expenses are AY'SU

always treated as and

deducted from revenue as incurred. BONG
 Income Comparison of
Absorption and Variable Costing

Let's assume the following additional

information for Hyla Company.
20,000 units were sold during the year at a price
of P30 each.
There is no beginning inventory.

net
Now, let's compute öperating
?
ncome using both absorption and SUM

variable Costing.
 Absorption Costing
Absorption Costing
Sales (20,000 x P30) P600,000
Less cost of goodssold:
Beginning inventory PO
Add CoGM (25,000 x P16) 400,000
Goods available for sale 400,000
Ending inventory (5,000 x P16) 80,000 320,000
Gross margin 280,000
Less selling & admin. exp.
Variable (20,000 x P3) P60,000
Fixed 100,000 160,000
Net operating income P120,000
 Variable Costing
Variable!
manufacturing
Variable Costing
costs ony.
Sales (20,000 x P30) P600,000
Less variable expenses:
Beginning inventory PO
Allfxed
Add CoGM (25,000 x P1) 250,000
Goods availa ble for sale manufacturing
250,000
overhead isg
Less ending inventory (5,000 ×P10) 50,000
expensed:
Variable cost of goods sold 200,000
Variable selling & administrative
expenses (20,000 x P3) 60,000 260,000
Contribution margin 340,000
Less fixed expenses:
Manufacturing overhe ad P150,000
Selling & administrative expenses 100,000 250,000
Net operating income P90,000
ExtendedComparison of Income Data
Here is information about the operation
of Hyla Company for the second year.
Number of units produced 25,000
Number of units sold 30,000
Units in beginning inventory 5,000
Unit sales price P30
Variable costs per unit:
Direct materials, direct labor
variable mfg. overhead P10
Selling &
administrative
expenses P3
Fixed costs per year:
Manufacturing overhead P150,000
Selling & administrative
expenses P100,000
 Unit Cost Computations

Absorption Variable
Costing Costing
Direct materials, direct labor,
and variable mfg. overhead P10.00 P10.00
Fixed mfg. overhead
($150,000 +25,000 units) 6
Unit product cost P16.00v P10.00 V

Since there was no change in the variable costs

per unit, total fixed costs, orthe number of

units produced, the unit costs remain unchanged.
 Absorption Costing
Absorption Costing
×
Sales (30,000 P30) P900,000
Less cost of goods sold:
Beg. inventory (5,000 * P16) P80,000
Add COGM (25,000 x P16) 400,000
Goods available for sale 480,000
Less ending invetory 480,000
Gross margin 420,000
Less selling & admir exp.
Variable (30,000 x A3) P90,000
Fixed 100,000 190,000
Net operating income P230,000

These are the 25,000 units

oroduced jnthecirent peripd.
 Variable
nanufacturing:
Variable Costs only
Variable Costing
Sales (30,000 * P30) P900,000
Less variable expenses:
Beg. inventory (5,000x Pi0) P50,000
Add COGM (25,000 x P10) 250,000 All fixed
Goods available for sale 300,000
manufacturing
Less ending inventory Dverhead is:
Variable cost of goods sold 300,000
expensed
Variable selling &
administrative
expenses (30,000 x P3) 90,000 390,000
Contribution margin 510,000
Less fixed expenses:
Manufacturing overhead P150,006
Selling & administrative expenses 100,000 250,000
Net operating income P260,000
 Learning Objective 3

Reconcile variable costing and

absorption costing net operating
incomes and explain why the two
amounts differ.

ONG
 Comparing Absorption and
Variable Costing: Year 1
Let'scompare the methods.

Cost of
Goods Ending Period
Sold Inventory Expense Total
Absorption costing
Variable mfg. costs P200,000 P50,000 PO P250,000
Fixed mfg. costs 120,000 30,000 150,000
P320,000 P80,000 PO P400,000

Variable costing
Variable mfg. costs P200,000 P50,000 PO P250,000
Fixed mfg. costs 150,000 150,000
P200,000 P50,000 P150,000 P400,000
 Comparing Absorption and
Variable Costing: Year 1
We can reconcile the difference between absorption
and variable net operating income as follows:

Absorption costing net operating income P120,000

Add: Fixed mfg OH in Beg invty
Total 120,000
Less:Fixed OH in Ending Invty 30,000
Variable cosing net operating income P90,000

Fixed mfg. overhead P150,000

Units produced 25,000 units
= P6.00 per
 Comparing Absorption and
Variable Costing: Year 2
We can reconcile the difference between absorption
and variable net operating income as follows:
Absorption costing net operating income P230,000
Add: Fx OH in Beg invty 30,000
Total 260,000
Less: Fx OH in Ending Invty

Variable costing net income P260,000

Fixed mfg. overhead P150,000

Units produced 25,000 units
= P6.00 peunt
 Comparing Absorptionand
Variable Costing: Year 2
We can reconcile the difference between absorption
and variable net operating income as follows:
Variable costing net operating income P260,000
Deduct: Fixed manufacturing overhead
costs released from inventory
(5,000 units x P6 per unit) 30,000
Absorption costing net operating income P230,000

Fixed mfg. overhead P150,000

Units produced 25,000 units
= P6.00 pefnit
 Comparing Absorption and
Variable Costing: Years 1 and 2

Costing Method 1st Period 2nd Period Total

Absorption P120,000 P230,000 P350,000

Variable 90,000 260,000 350,000

'S U

ONE
 Summary of Key Insights
Relation between Effect Relation between
units produced on variable and
and unit sales inventory absorption NOI
Units produced Inventory Absorption
increases
Unit sales Variable
Units produced Inventory Absorption
decreases
Unit sales Variable
Units produced Absorption
No change AY'S U

Unit sales Variable

NOl =net operating income

 Absorption Costing/Va
Costing

PowerPoint Authors:
Jon A. Booker, Ph.D., CPA,CIA
Charles W. Caldwell, D.B.A., CMA
SusanCoomer Galbreath, Ph.D., CPA
MeGer-HiNree Copyrtglte 2010 by The McGaae HHCopantes, Inc. AM gltsresereed.