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Variable Costing: A Tool for Management . Chapter Seven. Product Costs. Direct Materials. Product Costs. Direct Labor. Variable Manufacturing Overhead. Fixed Manufacturing Overhead. Period Costs. Period Costs. Variable Selling and Administrative Expenses.

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Presentation Transcript
overview of absorption and variable costing

ProductCosts

Direct Materials

ProductCosts

Direct Labor

Variable Manufacturing Overhead

Fixed Manufacturing Overhead

PeriodCosts

PeriodCosts

Variable Selling and Administrative Expenses

Fixed Selling and Administrative Expenses

Overview of Absorptionand Variable Costing

AbsorptionCosting

VariableCosting

quick check
Quick Check 

Which method will produce the highest values for work in process and finished goods inventories?

a. Absorption costing.

b. Variable costing.

c. They produce the same values for these inventories.

d. It depends. . .

unit cost computations
Unit Cost Computations

Harvey Company produces a single productwith the following information available:

unit cost computations1
Unit Cost Computations

Unit product cost is determined as follows:

Selling and administrative expenses arealways treated asperiod expensesand deducted from revenue as incurred.

income comparison of absorption and variable costing
Income Comparison ofAbsorption and Variable Costing

Let’s assume the following additional information for Harvey Company.

  • 20,000 units were sold during the year at a price of $30 each.
  • There were no units in beginning inventory.

Now, let’s compute net operatingincome using both absorptionand variable costing.

reconciliation

Fixed mfg. Overhead $150,000

Units produced 25,000 units

= = $6.00 per unit

Reconciliation

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

unit cost computations2
Unit Cost Computations

Since there was no change in the variable costsper unit, total fixed costs, or the number ofunits produced, the unit costs remain unchanged.

absorption costing1

These are the 25,000 units

produced in the current period.

Absorption Costing
variable costing1

Variablemanufacturing costs only.

All fixedmanufacturingoverhead isexpensed.

Variable Costing
reconciliation1

Fixed mfg. Overhead $150,000

Units produced 25,000 units

= = $6.00 per unit

Reconciliation

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