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Chapter 7. Variable Costing: A Tool for Management. Overview of Absorption and Variable Costing. Unit Cost Computations. Harvey Co. produces a single product with the following information available:. Unit Cost Computations. Unit product cost is determined as follows:.

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Variable Costing: A Tool for Management

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Chapter7

## Variable Costing:A Tool for Management

### Unit Cost Computations

Harvey Co. produces a single product with the following information available:

### Unit Cost Computations

Unit product cost is determined as follows:

Selling and administrative expenses arealways treated as period expenses and deducted from revenue.

### Income Comparison of Absorption and Variable Costing

Harvey Co. had no beginning inventory, produced25,000 units and sold 20,000 units this year.

### Income Comparison of Absorption and Variable Costing

Harvey Co. had no beginning inventory, produced 25,000 units and sold 20,000 units this year.

### Income Comparison of Absorption and Variable Costing

Now let’s look at variable costing by Harvey Co.

Variablecostsonly.

### Income Comparison of Absorption and Variable Costing

Let’s compare the methods.

### Income Comparison of Absorption and Variable Costing

Let’s compare the methods.

### Reconciliation

We can reconcile the difference betweenabsorption and variable income as follows:

Units produced 25,000

= = \$6.00 per unit

### Harvey Co. Year 2

In its second year of operations, Harvey Co. started with an inventory of 5,000 units, produced 25,000 units and sold 30,000 units.

### Harvey Co. Year 2

Unit product cost is determined as follows:

No change in Harvey’s

cost structure.

### Harvey Co. Year 2

These are the 25,000 units

produced in the current period.

### Harvey Co. Year 2

Variablecostsonly.

### Income Comparison of Absorption and Variable Costing

Let’s compare the methods.

### Reconciliation

We can reconcile the difference betweenabsorption and variable income as follows:

Units produced 25,000

= = \$6.00 per unit

### Summary

Fixed costs arenot really the costsof any particularproduct.

All manufacturing costsmust be assigned toproducts to properlymatch revenues and costs.

VariableCosting

AbsorptionCosting

### Variable versus Absorption Costing

Depreciation, taxes, insurance and salariesare just as essential to products as variable costs.

These are capacitycosts and will beincurred if nothingis produced.

VariableCosting

AbsorptionCosting

### Advantages of the Contribution Approach

Consistent with

CVP analysis.

Management finds it

easy to understand.

Net income is closerto net cash flow.

Consistent with standardcosts and flexible budgeting.

Easier to estimate profitabilityof products and segments.

Impact of fixed

costs on profits

emphasized.

Profit is not affected bychanges in inventories.

### Impact of JIT Inventory Methods

In a JIT inventory system . . .

Productiontends to equalsales . . .

So, the difference between variable and

absorption income tends to disappear.