CHAPTER 13 : VARIABLE COSTING Direct Labor Direct Labor

Variable MOH Variable MOH

Variable Costing, concept:
Fixed MOH
Also called directing costing, and it is a method Period Cost Period Cost
of recording and reporting costs which regards Variable S&GA Variable S&GA
ONLY the VARIABLE MANUFACTURING COSTS expense expense
as products costs. Fixed S&GA expense Fixed S&GA expense
Fixed MOH
Aids in:

I. Construction of IS with highlights in the 2. As to net income

contribution margin
II. Facilitates managerial decision making Relationship Net income
process between product
and sales
Note: Fixed Manufacturing costs are written off
P=S AC=VC
as period costs. It believes that the fixed part of
P> S AC>VC
FOH is related more to capacity to produce than P<S AC<VC
to the actual production of units and therefore
should be charged off as expense. When P=S, AC=VC
Issues: Amount of FC charged to operation is
the same in both method.
I. Cannot be used for EXTERNAL
REPORTING When P>S, AC>VC
II. Assets are understated Part of the period’s production would
III. Not accepted in accounting practice increase inventory and under
ADVANTAGES OF USING VARIABLE COSTING absorption, part of the period’s cost
would go along with it.
I. Meets the 3 objective of management
control system (cost can be separated When P<S, AC<VC
and controlled) Part of the sale would come from
II. Net income is not affected by changes beginning inventory, which carry with it
in inventory a portion of the period is fixed
III. No allocation of fixed cost overhead.
IV. Effective in planning for cost control as
standard cost and flexible budget 3. As to amount of inventory
Inventory value is higher under
DISADVANTAGES OF USING VARIABLE
absorption because it carries with it a
COSTING
part of the fixed overhead
I. Encourage a short sighted a
approach to profit planning @ expense RECOCILIATION OF NET INCOME
of long run situation UNDER VARIABLE TO NET INCOME
II. Tends to give the impression that VC UNDER ABSORPTION
are recovered first
III. Not acceptable for external and tax
Net Income, Absorption costing xx
reporting
Add: FOH in beginning inventory xx
ABSORPTION COSTING, concept Total xx
Less: FOH in Ending Inventory (xx)
Also known as full, traditional conventional and Net Income: Variable Costing xx
normal costing. A method which all
manufacturing cost (fixed or variable) are
treated as product or inventorial cost

COMPARISON BETWEEN VARIABLE AND

ABSORPTION COSTING

1. As to treatment of costs
ABSORPTION VARIABLE
Product Costs Product Costs
Direct Materials Direct Materials
 VARIABLE COSTING
ABSORPTION COSTING: ( with fixed overhead
variance)
Sales ( # of unit sold x selling price) x
Less: Variable cost of sales Sales ( # of unit sold x selling price) x
DM ( # of unit sold x unit price) x Less: Cost of good sold
DL ( # of unit sold x unit price) x Inventory, beginning x
VFOH ( # of unit sold x unit price) x Cost of goods manufactured x
Total x ( # of unit produced x unit price)
Manufacturing Margin x Total Available x x
Less: V Marketing Costs (x) Less: Inventory,end (x)
Contribution Margin- Final x Costs of good sold @ standard x
Less: Fixed Costs Add ( deduct) under (over) applied x
Manufacturing x Cost of sale @ actual x
Selling and administrative x Gross Profit x
Total x Less: Operating Expense
Net income x Variable S&GA x
Fixed S&GA x x
Net Income x
Variable cost of Sale may also be
computed as follows:
The units to be used is the produced
Inventory, beginning ( FG beg x Unit cost of FFOH)
multiplied by the standard cost per unit.
Add: Cost of good manufactured
DM ( # of units produces x unit price)
DL ( # of units produces x unit price)
WHY MANAGERS PREFER DIRECT
FOH- Variable ( # of units produces x unit cost)
COSTING TO ABSORPTION COSTING
Total Available for sale

Less: Inventory, ending ( FG end x Unit cost of FFOH) It seperates fixed from variable costs
which makes it easier to compare
Cost of sales ACTUAL OPERATING INCOME to
PLANNED OPERATING INCOME

ABSORPTION COSTING: VARIABLE ABSORPTION

Sales ( # of unit sold x selling price) x Income is Income is
Less: Cost of good sold associated with influenced by
sales units produced
Inventory, beginning x
Cost of goods manufactured x and sold
( # of unit produced x unit price)
Total Available x x
Less: Inventory,end (x)
Costs of good sold x
Gross Profit x
Less: Operating Expense
Variable S&GA x
Fixed S&GA x x
Net Income x