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Describe and illustrate income reporting under variable costing and absorption costing. PowerPoint Presentation
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Describe and illustrate income reporting under variable costing and absorption costing. - PowerPoint PPT Presentation


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Chapter 19 - Objectives. Describe and illustrate income reporting under variable costing and absorption costing. Describe and illustrate income analysis under variable costing and absorption costing. Two Costing Methods. Absorption Costing. Used for external financial reporting

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slide1

Chapter 19 - Objectives

  • Describe and illustrate income reporting under variable costing and absorption costing.
  • Describe and illustrate income analysis under variable costing and absorption costing.
slide2

Two Costing Methods

Absorption Costing

  • Used for external financial reporting
  • Includes direct materials, direct labor, variable factory overhead, and fixed factoryoverhead as part of total product cost
slide3

Two Costing Methods

Variable Costing

  • Used for internalplanning and decision making
  • Does not include fixed factory overheadas a product cost
slide4

Direct

Materials

Direct

Labor

Variable

Factory OH

Fixed

Factory OH

Period Expense

Absorption Costing Compared to Variable Costing

Absorption Costing

Cost of Goods Manufactured

Cost of Goods Manufactured

Variable Costing

variable costing income statement

Units Manufactured Equal Units Sold

Variable Costing Income Statement

Sales (15,000 x $50) $750,000

Variable cost of goods sold:

Variable cost of goods mfg.

(15,000 x $25) $375,000

Less ending inventory 0

Variable cost of goods sold 375,000

Manufacturing margin $375,000

Variable selling and administrative

expenses (15,000 x $5) 75,000

Contribution margin $300,000

Fixed costs:

Fixed manufacturing costs $150,000

Fixed selling and administrative

expenses 50,000 200,000

Income from operations $100,000

slide6

Units Manufactured Equal Units Sold

Absorption Costing Income Statement

Sales (15,000 x $50) $750,000

Cost of goods sold:

Cost of goods manufactured

(15,000 x $35) $525,000

Less ending inventory 0

Cost of goods sold 525,000

Gross profit $225,000

Selling and administrative expenses

($75,000 + $50,000) 125,000

Income from operations $100,000

Income from operations $100,000

When the number of units manufactured equals the number of units sold, income from operations will be the same under both methods.

variable costing income statement7

Units Manufactured Exceed Units Sold

Variable Costing Income Statement

Sales (12,000 x $50) $600,000

Variable cost of goods sold:

Variable cost of goods manufactured

(15,000 x $25) $375,000

Less ending inventory (3,000 x $25) 75,000

Variable cost of goods sold 300,000

Manufacturing margin $300,000

Variable selling and admin. expenses 60,000

Contribution margin $240,000

Fixed costs:

Fixed manufacturing costs $150,000

Fixed selling and admin. expenses 50,000 200,000

Income from operations $ 40,000

absorption costing income statement
Absorption Costing Income Statement

Units Manufactured Exceed Units Sold

Sales (12,000 x $50) $600,000

Cost of goods sold:

Cost of goods manufactured

(15,000 x $35) $525,000

Less ending inventory (3,000 x $35) 105,000

Cost of goods sold 420,000

Gross profit $180,000

Selling and administrative expenses

[(12,000 x $5) + $50,000] 110,000

Income from operations $ 70,000

slide9

Units Manufactured Exceed Units Sold

Operating Income:

Absorption costing $70,000

Variable costing 40,000

Difference $30,000

Why is absorption costing income higher when units manufactured exceed units sold?

slide10

Units Manufactured Exceed Units Sold

Operating Income:

Absorption costing $70,000

Variable costing 40,000

Difference $30,000

Analysis:

Units manufactured 15,000

Units sold 12,000

Ending inventory units 3,000

Fixed cost per unit x $10

Difference $30,000

variable costing income statement11

Units Manufactured Are Less Than Units Sold

Variable Costing Income Statement

Sales (15,000 x $50) $750,000

Variable cost of goods sold:

Beginning inventory (5,000 x $25) $125,000

Variable cost of goods manufactured (10,000 x $25) 250,000 375,000

Manufacturing margin $375,000

Variable selling and admin. expenses 75,000

Contribution margin $300,000

Fixed costs:

Fixed manufacturing costs $150,000

Fixed selling and admin. expenses 50,000 200,000

Income from operations $100,000

slide12

Units Manufactured Are Less Than Units Sold

Variable Costing Income Statement

Sales (15,000 x $50) $750,000

Variable cost of goods sold:

Beginning inventory (5,000 x $25) $125,000

Variable cost of goods manufactured (10,000 x $25) 250,000 375,000

Manufacturing margin $375,000

Variable selling and admin. expenses 75,000

Contribution margin $300,000

Fixed costs:

Fixed manufacturing costs $150,000

Fixed selling and admin. expenses 50,000 200,000

Income from operations $100,000

absorption costing income statement13

Units Manufactured Are Less Than Units Sold

Absorption Costing Income Statement

Sales (15,000 x $50) $750,000

Cost of goods sold:

Beginning inventory (5,000 x $35) $175,000

Cost of good manufactured (10,000 x $45) 400,000

Cost of goods sold 575,000

Gross profit $175,000

Selling and administrative expenses

($75,000 + $50,000) 125,000

Income from operations $ 50,000

slide14

Units Manufactured Are Less Than Units Sold

Operating Income:

Variable costing $100,000

Absorption costing 50,000

Difference $ 50,000

Why is variable costing income higher when units manufactured are less than units sold?

slide15

Operating Income:

Variable costing $100,000

Absorption costing 50,000

Difference $ 50,000

Units Manufactured Are Less Than Units Sold

Analysis:

Units sold 15,000

Units manufactured 10,000

Beginning inventory units 5,000

Fixed cost per unit x $10

Difference $50,000

slide16

IF

Units Sold <Units produced

THEN

Variable Costing <Absorption Costing

Income Income

slide17

IF

Units Sold >Units produced

THEN

Variable Costing >Absorption Costing

Income Income

slide18

Income Analysis Under Variable Costing and Absorption Costing

Frand Manufacturing Company has no beginning inventory and sales are estimated to be 20,000 units at $75 per unit, regardless of production levels.

slide19

Total Cost

Unit Cost

Manufacturing costs:

Variable $ 700,000 $35

Fixed 400,000 20

Total costs $1,100,000 $55

Selling and administrative exp.

Variable ($5 per unit sold) $ 100,000

Fixed 100,000

Total expenses $ 200,000

Income Analysis Under Variable Costing and Absorption Costing

Proposal 1: 20,000 Units to Be Manufactured and Sold

slide20

Total Cost

Unit Cost

Manufacturing costs:

Variable $ 875,000 $35

Fixed 400,000 16

Total costs $1,275,000 $51

Selling and administrative exp.

Variable ($5 per unit sold) $ 100,000

Fixed 100,000

Total expenses $ 200,000

Income Analysis Under Variable Costing and Absorption Costing

Proposal 2: 25,000 Units to Be Manufactured; 20,000 Units to Be Sold

slide21

Frand Manufacturing Company

Absorption Costing Income Statements

20,000 Units Manufactured

25,000 Units Manufactured

Sales $1,500,000$1,500,000

Cost of goods sold:

Cost of goods manufactured (20,000 units x $55) $1,100,000

slide22

Frand Manufacturing Company

Absorption Costing Income Statements

20,000 Units Manufactured

25,000 Units Manufactured

Sales $1,500,000$1,500,000

Cost of goods sold:

Cost of goods manufactured (20,000 units x $55) $1,100,000

(25,000 units x $51) $1,275,000

slide23

Frand Manufacturing Company

Absorption Costing Income Statements

20,000 Units Manufactured

25,000 Units Manufactured

Sales $1,500,000$1,500,000

Cost of goods sold:

Cost of goods manufactured (20,000 units x $55) $1,100,000

(25,000 units x $51) $1,275,000

Less ending inventory: (5,000 units x $51) 255,000

Cost of goods sold $1,100,000$1,020,000

Gross profit $ 400,000 $ 480,000

Selling and administrative expenses ($100,000 + $100,000) 200,000 200,000

Income from operations $ 200,000 $ 280,000

slide24

Frand Manufacturing Company

Variable Costing Income Statements

20,000 Units Manufactured

25,000 Units Manufactured

Sales $1,500,000$1,500,000

Variable cost of goods sold:

Variable cost of goods manufactured: (20,000 units x $35) $ 700,000

(25,000 units x $35) $ 875,000

slide25

Frand Manufacturing Company

Variable Costing Income Statements

20,000 Units Manufactured

25,000 Units Manufactured

Sales $1,500,000$1,500,000

Variable cost of goods sold:

Variable cost of goods manufactured: (20,000 units x $35) $ 700,000

(25,000 units x $35) $ 875,000

Less ending inventory:

(0 units x $35) 0

(5,000 units x $35) 175,000

Variable cost of goods sold $ 700,000$ 700,000

Manufacturing margin $ 800,000 $ 800,000

Continued

slide26

Frand Manufacturing Company

Variable Costing Income Statements

20,000 Units Manufactured

25,000 Units Manufactured

Manufacturing margin $ 800,000 $ 800,000

Variable selling and administrative expenses 100,000 100,000

Contribution margin $ 700,000$ 700,000

Fixed costs: Fixed manufacturing costs $ 400,000 $ 400,000

Fixed selling and administrative expenses 100,000 100,000

Total fixed costs $ 500,000$ 500,000

Income from operations $ 200,000 $ 200,000

slide27

Frand Manufacturing Company

Variable Costing Income Statements

30,000 Units Manufactured

Suppose 30000 units were manufactured

Sales $1,500,000

Variable cost of goods sold:

Variable cost of goods manufactured: (30,000 units x $35) $1,050,000

Less ending inventory: (10,000 units x $35) 350,000

Variable cost of goods sold $ 700,000

Manufacturing margin $ 800,000

Continued

slide28

Frand Manufacturing Company

Variable Costing Income Statements

30,000 Units Manufactured

Manufacturing margin $ 800,000

Variable selling and administrative expenses 100,000

Contribution margin $ 700,000

Fixed costs: Fixed manufacturing costs $ 400,000

Fixed selling and administrative expenses 100,000

Total fixed costs $ 500,000

Income from operations $ 200,000

slide29

Management’s Use of Costing Methods

Variable costingreports and absorption costingreports are useful in the following situations:

1. Controlling costs

2. Pricing products

3. Planning production

4. Analyzing market segments

5. Analyzing contribution margins