Prepared by Debby Bloom-Hill CMA, CFM CHAPTER CHAPTER 55 Variable Costing Full Full (Absorption) (Absorption) Costing Costing   Required by GAAP for external reporting purposes Inventory costs include:  Direct materials used   Direct labor incurred   Generally variable Generally variable Manufacturing overhead  Includes both fixed and variable costs Learning objective 1: Explain the difference between full (absorption) and variable costing, Slide 5-3 and prepare an income statement using variable costing Variable Variable Costing Costing  Inventory costs includes:       Direct materials used Direct labor incurred Variable manufacturing overhead Fixed manufacturing overhead treated as a period cost Helpful for internal decision making Not allowed for GAAP reporting Learning objective 1: Explain the difference between full (absorption) and variable costing, Slide 5-4 and prepare an income statement using variable costing Test Your Knowledge Which of the following complies with GAAP for external reporting purposes? a b c d Absolute costing Variable costing Fixed costing Full costing Answer: d Full costing, also known as absorption costing Slide 5-5 Learning objective 1: Explain the difference between full (absorption) and variable costing, and prepare an income statement using variable costing Full Full (Absorption) (Absorption) Costing Costing Learning objective 1: Explain the difference between full (absorption) and variable costing, Slide 5-6 and prepare an income statement using variable costing Variable Variable Costing Costing Learning objective 1: Explain the difference between full (absorption) and variable costing, Slide 5-7 and prepare an income statement using variable costing Difference Difference Between Between Full Full and and Variable Variable Costing Costing  The only difference between full and variable costing is their treatment of fixed manufacturing overhead  Under full costing, fixed manufacturing overhead is included in inventory  These costs enter into the determination of expense only when the inventory is sold  Under variable costing, fixed manufacturing overhead becomes a period expense Learning objective 1: Explain the difference between full (absorption) and variable costing, Slide 5-8 and prepare an income statement using variable costing Variable Variable Costing Costing Income Income Statement Statement  Classifies all expenses in terms of their cost behavior, either fixed or variable  With variable and fixed expenses separated, the contribution margin can be presented  Contribution margin is revenues minus total variable expenses  The contribution margin allows users to make reasonable estimates of how much profit will change with changes in sales Learning objective 1: Explain the difference between full (absorption) and variable costing, Slide 5-9 and prepare an income statement using variable costing Variable Variable Costing Costing Income Income Statement Statement  Sales are $100,000 and the contribution margin is $65,000    Calculate the contribution margin ratio:  Calculate the change in contribution margin if sales change by $10,000,000 $10,000,000 * 0.65 = $6,500,000 Learning objective 1: Explain the difference between full (absorption) and variable costing, Slide 5-10 and prepare an income statement using variable costing Clausen Clausen Tube Tube –– Variable Variable Costing Costing Income Income Statement Statement Production (6,000 units) is less than sales (7,200 units) Learning objective 2: Discuss the effect of production on full and variable costing income; explain the impact of JIT (just-in-time) on the difference between full and variable costing income; and discuss the benefits of variable costing for internal reporting purposes Slide 5-27 Quantity Quantity Produced Produced is is Less Less Than Than Quantity Quantity Sold Sold  When the quantity produced is less than the quantity sold, income will be greater under variable costing as opposed to full costing   Beginning inventory under fixed costing includes fixed manufacturing overhead When the beginning inventory is charged to cost of goods sold the charge will be higher under full costing Learning objective 2: Discuss the effect of production on full and variable costing income; explain the impact of JIT (just-in-time) on the difference between full and variable costing income; and discuss the benefits of variable costing for internal reporting purposes Slide 5-28 Variable Variable Costing Costing for for External External Reporting Reporting Learning objective 2: Discuss the effect of production on full and variable costing income; explain the impact of JIT (just-in-time) on the difference between full and variable costing income; and discuss the benefits of variable costing for internal reporting purposes Slide 5-29 Test Your Knowledge Summit Manufacturing, Inc produces snow shovels The selling price is $25 Costs are: Production is 42,000 snow shovels Calculate full cost per unit Learning objective 2: Discuss the effect of production on full and variable costing income; explain the impact of JIT (just-in-time) on the difference between full and variable costing income; and discuss the benefits of variable costing for internal reporting purposes Slide 5-30 Test Your Knowledge Summit Manufacturing, Inc produces snow shovels The selling price is $25 Costs are: Production is 42,000 snow shovels Full cost is $13 per unit Learning objective 2: Discuss the effect of production on full and variable costing income; explain the impact of JIT (just-in-time) on the difference between full and variable costing income; and discuss the benefits of variable costing for internal reporting purposes Slide 5-31 Test Your Knowledge Summit Manufacturing, Inc produces snow shovels The selling price is $25 Costs are: Production is 42,000 snow shovels Calculate variable cost per unit Learning objective 2: Discuss the effect of production on full and variable costing income; explain the impact of JIT (just-in-time) on the difference between full and variable costing income; and discuss the benefits of variable costing for internal reporting purposes Slide 5-32 Test Your Knowledge Summit Manufacturing, Inc produces snow shovels The selling price is $25 Costs are: Production is 42,000 snow shovels Variable cost is $9 per unit Learning objective 2: Discuss the effect of production on full and variable costing income; explain the impact of JIT (just-in-time) on the difference between full and variable costing income; and discuss the benefits of variable costing for internal reporting purposes Slide 5-33 Impact Impact of of Method Method Selection Selection on on Income Income Statement Statement  Units produced = units sold   Units produced greater than units sold   No difference in net income Full costing yields higher net income Units produced less than units sold  Variable costing yields higher net income Learning objective 2: Discuss the effect of production on full and variable costing income; explain the impact of JIT (just-in-time) on the difference between full and variable costing income; and discuss the benefits of variable costing for internal reporting purposes Slide 5-34 Reducing Reducing Production Production Learning objective 2: Discuss the effect of production on full and variable costing income; explain the impact of JIT (just-in-time) on the difference between full and variable costing income; and discuss the benefits of variable costing for internal reporting purposes Slide 5-35 Test Your Knowledge Kincade Faucets produces a variety of faucets During the year, the company incurred $400,000 of depreciation expense on its manufacturing equipment How much depreciation expense will be in Finished Goods Inventory under variable costing? a b c d $400,000 $285,714 $0 None of the above Answer: c Depreciation is a fixed cost which is expensed as a period cost under variable costing Learning objective 2: Discuss the effect of production on full and variable costing income; explain the impact of JIT (just-in-time) on the difference between full and variable costing income; and discuss the benefits of variable costing for internal reporting purposes Slide 5-36 Impact Impact of of JIT JIT on on Income Income    Companies using JIT typically have low levels of inventory Units produced are approximately equal to units sold Difference between full costing and variable costing is likely to be very small Learning objective 2: Discuss the effect of production on full and variable costing income; explain the impact of JIT (just-in-time) on the difference between full and variable costing income; and discuss the benefits of variable costing for internal reporting purposes Slide 5-37 Benefits Benefits of of Variable Variable Costing Costing for for Internal Internal Reporting Reporting  Variable costing facilitates cost-volume-profit (CVP) analysis   Separates fixed and variable costs Allows managers to accurately estimate the impact of changes in volume on cost and profit  Cannot be answered using full costing Learning objective 2: Discuss the effect of production on full and variable costing income; explain the impact of JIT (just-in-time) on the difference between full and variable costing income; and discuss the benefits of variable costing for internal reporting purposes Slide 5-38 Benefits Benefits of of Variable Variable Costing Costing for for Internal Internal Reporting Reporting  Variable costing limits management of earnings via production volume    Managers are often compensated based on income in their division Full costing produces higher income when production is greater than sales Managers have an incentive to manage earnings under full costing Learning objective 2: Discuss the effect of production on full and variable costing income; explain the impact of JIT (just-in-time) on the difference between full and variable costing income; and discuss the benefits of variable costing for internal reporting purposes Slide 5-39 Impact Impact of of Changes Changes in in Sales Sales Learning objective 2: Discuss the effect of production on full and variable costing income; explain the impact of JIT (just-in-time) on the difference between full and variable costing income; and discuss the benefits of variable costing for internal reporting purposes Slide 5-40 Copyright Copyright © 2016 John Wiley & Sons, Inc All rights reserved Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc The purchaser may make back-up copies for his/her own use only and not for distribution or resale The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein Slide 5-41 .. .CHAPTER CHAPTER 55 Variable Costing Full Full (Absorption) (Absorption) Costing Costing   Required