1. describe and illustrate income reporting under variable costing and absorption costing. 2....
TRANSCRIPT
1. Describe and illustrate income reporting under variable costing and absorption costing.
2. Describe and illustrate income analysis under variable costing and absorption costing.
Chapter 19 - ObjectivesChapter 19 - ObjectivesChapter 19 - ObjectivesChapter 19 - Objectives
Two Costing MethodsTwo Costing Methods
Used for external financial reporting
Includes direct materials, direct labor, variable factory overhead, and fixed factory overhead as part of total product cost
Absorption CostingAbsorption Costing
Two Costing MethodsTwo Costing Methods
Variable CostingVariable Costing Used for internal planning and decision
making Does not include fixed factory overhead
as a product cost
Absorption Costing Compared to Absorption Costing Compared to Variable CostingVariable Costing
Variable Costing
Absorption Costing
Cost of Goods ManufacturedCost of Goods Manufactured
Cost of Goods ManufacturedCost of Goods Manufactured
DirectDirectMaterialsMaterials
DirectDirectLaborLabor
VariableVariableFactory OHFactory OH
FixedFixedFactory OHFactory OH
Period ExpensePeriod Expense
Variable Costing Income StatementSales (15,000 x $50) $750,000Variable cost of goods sold:
Variable cost of goods mfg.(15,000 x $25) $375,000
Less ending inventory 0Variable cost of goods sold 375,000
Manufacturing margin $375,000Variable selling and administrative
expenses (15,000 x $5) 75,000Contribution margin $300,000Fixed costs:
Fixed manufacturing costs $150,000Fixed selling and administrative
expenses 50,000 200,000Income from operations $100,000
Units Manufactured Equal Units SoldUnits Manufactured Equal Units Sold
Sales (15,000 x $50) $750,000Cost of goods sold: Cost of goods manufactured
(15,000 x $35) $525,000Less ending inventory 0Cost of goods sold 525,000
Gross profit $225,000Selling and administrative expenses
($75,000 + $50,000) 125,000Income from operations $100,000
Sales (15,000 x $50) $750,000Cost of goods sold: Cost of goods manufactured
(15,000 x $35) $525,000Less ending inventory 0Cost of goods sold 525,000
Gross profit $225,000Selling and administrative expenses
($75,000 + $50,000) 125,000Income from operations $100,000 Income from operations $100,000
Absorption Costing Income Statement
Units Manufactured Equal Units SoldUnits Manufactured Equal Units Sold
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 Statement
Sales (12,000 x $50) $600,000Variable 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 $300,000Variable selling and admin. expenses 60,000Contribution margin $240,000Fixed costs:
Fixed manufacturing costs $150,000Fixed selling and admin. expenses 50,000 200,000
Income from operations $ 40,000
Units Manufactured Exceed Units SoldUnits Manufactured Exceed Units Sold
Absorption Costing Income StatementSales (12,000 x $50) $600,000Cost 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 $180,000Selling and administrative expenses [(12,000 x $5) + $50,000] 110,000Income from operations $ 70,000
Units Manufactured Exceed Units SoldUnits Manufactured Exceed Units Sold
Operating Income:Absorption costing $70,000Variable costing 40,000 Difference $30,000
Units Manufactured Exceed Units SoldUnits Manufactured Exceed Units Sold
Why is absorption costing income higher when units manufactured exceed units sold?
Why is absorption costing income higher when units manufactured exceed units sold?
Analysis:Units manufactured 15,000Units sold 12,000Ending inventory units 3,000Fixed cost per unit x $10 Difference $30,000
Units Manufactured Exceed Units SoldUnits Manufactured Exceed Units Sold
Operating Income:Absorption costing $70,000Variable costing 40,000 Difference $30,000
Sales (15,000 x $50) $750,000Variable cost of goods sold:
Beginning inventory (5,000 x $25) $125,000Variable cost of goods manufactured
(10,000 x $25) 250,000 375,000Manufacturing margin $375,000Variable selling and admin. expenses 75,000Contribution margin $300,000Fixed costs:
Fixed manufacturing costs $150,000Fixed selling and admin. expenses 50,000 200,000
Income from operations $100,000
Units Manufactured Are Less Than Units SoldUnits Manufactured Are Less Than Units SoldVariable Costing Income Statement
Sales (15,000 x $50) $750,000Variable cost of goods sold:
Beginning inventory (5,000 x $25) $125,000Variable cost of goods manufactured
(10,000 x $25) 250,000 375,000Manufacturing margin $375,000Variable selling and admin. expenses 75,000Contribution margin $300,000Fixed costs:
Fixed manufacturing costs $150,000Fixed selling and admin. expenses 50,000 200,000
Income from operations $100,000
Units Manufactured Are Less Than Units SoldUnits Manufactured Are Less Than Units SoldVariable Costing Income Statement
Sales (15,000 x $50) $750,000Cost of goods sold:
Beginning inventory (5,000 x $35) $175,000Cost of good manufactured
(10,000 x $45) 400,000Cost of goods sold 575,000
Gross profit $175,000Selling and administrative expenses
($75,000 + $50,000) 125,000Income from operations $ 50,000
Absorption Costing Income StatementUnits Manufactured Are Less Than Units SoldUnits Manufactured Are Less Than Units Sold
Operating Income:Variable costing $100,000Absorption costing 50,000 Difference $ 50,000
Units Manufactured Are Less Than Units SoldUnits Manufactured Are Less Than Units Sold
Why is variable costing income higher when units manufactured are
less than units sold?
Why is variable costing income higher when units manufactured are
less than units sold?
Units Manufactured Are Less Than Units SoldUnits Manufactured Are Less Than Units Sold
Analysis:Units sold 15,000Units manufactured 10,000Beginning inventory units 5,000Fixed cost per unit x $10 Difference $50,000
Operating Income:Variable costing $100,000Absorption costing 50,000 Difference $ 50,000
IFIF Units Sold < Units produced
THENTHEN Variable Costing < Absorption CostingIncome Income
IFIF Units Sold > Units produced
THENTHEN Variable Costing > Absorption CostingIncome Income
Income Analysis Under Variable Income Analysis Under Variable Costing and Absorption CostingCosting and Absorption Costing
Income Analysis Under Variable Income Analysis Under Variable Costing and Absorption CostingCosting 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.
Frand Manufacturing Company has no beginning
inventory and sales are estimated to be 20,000 units at
$75 per unit, regardless of production levels.
Income Analysis Under Variable Income Analysis Under Variable Costing and Absorption CostingCosting and Absorption Costing
Income Analysis Under Variable Income Analysis Under Variable Costing and Absorption CostingCosting and Absorption Costing
Proposal 1: 20,000 Units to Be Manufactured and Sold
Total Cost Unit CostManufacturing costs:
Variable $ 700,000 $35Fixed 400,000 20 Total costs $1,100,000 $55
Selling and administrative exp.Variable ($5 per unit sold) $ 100,000Fixed 100,000 Total expenses $ 200,000
Income Analysis Under Variable Income Analysis Under Variable Costing and Absorption CostingCosting and Absorption Costing
Income Analysis Under Variable Income Analysis Under Variable Costing and Absorption CostingCosting and Absorption Costing
Total Cost Unit CostManufacturing costs:
Variable $ 875,000 $35Fixed 400,000 16 Total costs $1,275,000 $51
Selling and administrative exp.Variable ($5 per unit sold) $ 100,000Fixed 100,000 Total expenses $ 200,000
Proposal 2: 25,000 Units to Be Manufactured; 20,000 Units to Be Sold
Frand Manufacturing CompanyAbsorption Costing Income Statements
20,000 Units Manufactured
25,000 Units Manufactured
Sales $1,500,000 $1,500,000Cost of goods sold:
Cost of goods manufactured(20,000 units x $55) $1,100,000
Frand Manufacturing CompanyAbsorption Costing Income Statements
20,000 Units Manufactured
25,000 Units Manufactured
Sales $1,500,000 $1,500,000Cost of goods sold:
Cost of goods manufactured(20,000 units x $55) $1,100,000(25,000 units x $51) $1,275,000
Frand Manufacturing CompanyAbsorption Costing Income Statements
20,000 Units Manufactured
25,000 Units Manufactured
Sales $1,500,000 $1,500,000Cost 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 $1,020,000Gross profit $ 400,000 $ 480,000Selling and administrative expenses
($100,000 + $100,000) 200,000 200,000Income from operations $ 200,000$ 200,000 $ 280,000$ 280,000
Frand Manufacturing CompanyVariable Costing Income Statements
20,000 Units Manufactured
25,000 Units Manufactured
Sales $1,500,000 $1,500,000Variable cost of goods sold:
Variable cost of goods manufactured:(20,000 units x $35) $ 700,000(25,000 units x $35) $ 875,000
Frand Manufacturing CompanyVariable Costing Income Statements
20,000 Units Manufactured
25,000 Units Manufactured
Sales $1,500,000 $1,500,000Variable 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 $ 700,000Manufacturing margin $ 800,000 $ 800,000
ContinuedContinuedContinuedContinued
Frand Manufacturing CompanyVariable Costing Income Statements
20,000 Units Manufactured
25,000 Units Manufactured
Manufacturing margin $ 800,000 $ 800,000Variable selling and administrative
expenses 100,000 100,000Contribution margin $ 700,000 $ 700,000Fixed costs:
Fixed manufacturing costs $ 400,000 $ 400,000Fixed selling and administrative
expenses 100,000 100,000Total fixed costs $ 500,000 $ 500,000
Income from operations $ 200,000 $ 200,000
Frand Manufacturing CompanyVariable Costing Income Statements
30,000 Units Manufactured
Sales $1,500,000Variable 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 $ 700,000Manufacturing margin $ 800,000
ContinuedContinuedContinuedContinued
Suppose 30000 units were manufactured
Frand Manufacturing CompanyVariable Costing Income Statements
30,000 Units Manufactured
Manufacturing margin $ 800,000Variable selling and administrative
expenses 100,000Contribution margin $ 700,000Fixed costs:
Fixed manufacturing costs $ 400,000Fixed selling and administrative
expenses 100,000Total fixed costs $ 500,000
Income from operations $ 200,000
Management’s Use of Costing MethodsManagement’s Use of Costing MethodsManagement’s Use of Costing MethodsManagement’s Use of Costing Methods
1. Controlling costs
2. Pricing products
3. Planning production
4. Analyzing market segments
5. Analyzing contribution margins
Variable costing reports and absorption costing reports are useful in the following situations:
Accounting Reports and Accounting Reports and Management DecisionsManagement DecisionsAccounting Reports and Accounting Reports and Management DecisionsManagement Decisions
ACCOUNTING REPORTS
Absorption Costing and Variable Costing
MANAGEMENT