BUS 288

Chapter 8
Variable Costing
o Net income calculated is not
affected by changes in
production levels. As
a result, it is much easier to
understand the impact of fixed
and variable
costs on the calculation of net
income when variable costing is
used
o Net income calculated is
greatly affected by changes in
sales levels and it
therefore provides a more
realistic assessment of the
company’s success/
failure during a period
o Because the fixed and
variable components are shown
in the income
statement, it is easier to identify
these costs and understand their
effect
on the business
 Absorption costing 
allocation of fixed costs to
inventory makes
it difficult to evaluate the
impact of fixed costs on the
company’s
results
- Normal Costing: uses actual
direct manufacturing costs and
actual production units with
a predetermined OH rate
- Throughput Costing: also
called super-variable costing;
treats all costs as period
expenses except for direct
materials
 Modified form of variable
costing that treats direct labour
and variable MOH as
period expenses
 Based on lean manufacturing
principles (cost can be reduced
and profitability
increased by improvements in
the manufacturing workflow)
 A company should meet two
criteria before choosing this:
o The nature of the
manufacturing process; suitable
only for companies
engaged in a manufacturing
process in which conversion
costs are fixed
costs and do not vary
proportionately with the units of
production
 Assembly-line and
continuous processes that are
highly
automated most likely to meet
this criterion
o Management favour cost
accounting info that is helpful
for short-term,
incremental analysis, such as
whether a company should
accept/reject a
special offer at a reduced sales
price
 Product costs are only direct
material costs
 Inventory is valued using only
direct material costs and all
other manufacturing
costs are treated as expenses in
the accounting period in which
they occur
 Throughput Contribution: the
difference between the revenues
and direct
material costs for the units sold
 The one major difference
between throughput costing and
variable costing is
that under throughput costing,
the direct labour and variable
MOH are charged
as an expense in the current
period. Therefore, they are not
deferred to future
periods through the ending
inventory
BUS 288
Chapter 8
Variable Costing
o Net income calculated is not
affected by changes in
production levels. As
a result, it is much easier to
understand the impact of fixed
and variable
costs on the calculation of net
income when variable costing is
used
o Net income calculated is
greatly affected by changes in
sales levels and it
therefore provides a more
realistic assessment of the
company’s success/
failure during a period
o Because the fixed and
variable components are shown
in the income
statement, it is easier to identify
these costs and understand their
effect
on the business
 Absorption costing 
allocation of fixed costs to
inventory makes
it difficult to evaluate the
impact of fixed costs on the
company’s
results
- Normal Costing: uses actual
direct manufacturing costs and
actual production units with
a predetermined OH rate
- Throughput Costing: also
called super-variable costing;
treats all costs as period
expenses except for direct
materials
 Modified form of variable
costing that treats direct labour
and variable MOH as
period expenses
 Based on lean manufacturing
principles (cost can be reduced
and profitability
increased by improvements in
the manufacturing workflow)
 A company should meet two
criteria before choosing this:
o The nature of the
manufacturing process; suitable
only for companies
engaged in a manufacturing
process in which conversion
costs are fixed
costs and do not vary
proportionately with the units of
production
 Assembly-line and
continuous processes that are
highly
automated most likely to meet
this criterion
o Management favour cost
accounting info that is helpful
for short-term,
incremental analysis, such as
whether a company should
accept/reject a
special offer at a reduced sales
price
 Product costs are only direct
material costs
 Inventory is valued using only
direct material costs and all
other manufacturing
costs are treated as expenses in
the accounting period in which
they occur
 Throughput Contribution: the
difference between the revenues
and direct
material costs for the units sold
 The one major difference
between throughput costing and
variable costing is
that under throughput costing,
the direct labour and variable
MOH are charged
as an expense in the current
period. Therefore, they are not
deferred to future
periods through the ending
inventory

BUS 288
Chapter 8
Variable Costing
o Net income calculated is not
affected by changes in
production levels. As
a result, it is much easier to
understand the impact of fixed
and variable
costs on the calculation of net
income when variable costing is
used
o Net income calculated is
greatly affected by changes in
sales levels and it
therefore provides a more
realistic assessment of the
company’s success/
failure during a period
o Because the fixed and
variable components are shown
in the income
statement, it is easier to identify
these costs and understand their
effect
on the business
 Absorption costing 
allocation of fixed costs to
inventory makes
it difficult to evaluate the
impact of fixed costs on the
company’s
results
- Normal Costing: uses actual
direct manufacturing costs and
actual production units with
a predetermined OH rate
- Throughput Costing: also
called super-variable costing;
treats all costs as period
expenses except for direct
materials
 Modified form of variable
costing that treats direct labour
and variable MOH as
period expenses
 Based on lean manufacturing
principles (cost can be reduced
and profitability
increased by improvements in
the manufacturing workflow)
 A company should meet two
criteria before choosing this:
o The nature of the
manufacturing process; suitable
only for companies
engaged in a manufacturing
process in which conversion
costs are fixed
costs and do not vary
proportionately with the units of
production
 Assembly-line and
continuous processes that are
highly
automated most likely to meet
this criterion
o Management favour cost
accounting info that is helpful
for short-term,
incremental analysis, such as
whether a company should
accept/reject a
special offer at a reduced sales
price
 Product costs are only direct
material costs
 Inventory is valued using only
direct material costs and all
other manufacturing
costs are treated as expenses in
the accounting period in which
they occur
 Throughput Contribution: the
difference between the revenues
and direct
material costs for the units sold
 The one major difference
between throughput costing and
variable costing is
that under throughput costing,
the direct labour and variable
MOH are charged
as an expense in the current
period. Therefore, they are not
deferred to future
periods through the ending
inventory

BUS 288
Chapter 8
Variable Costing
o Net income calculated is not
affected by changes in
production levels. As
a result, it is much easier to
understand the impact of fixed
and variable
costs on the calculation of net
income when variable costing is
used
o Net income calculated is
greatly affected by changes in
sales levels and it
therefore provides a more
realistic assessment of the
company’s success/
failure during a period
o Because the fixed and
variable components are shown
in the income
statement, it is easier to identify
these costs and understand their
effect
on the business
 Absorption costing 
allocation of fixed costs to
inventory makes
it difficult to evaluate the
impact of fixed costs on the
company’s
results
- Normal Costing: uses actual
direct manufacturing costs and
actual production units with
a predetermined OH rate
- Throughput Costing: also
called super-variable costing;
treats all costs as period
expenses except for direct
materials
 Modified form of variable
costing that treats direct labour
and variable MOH as
period expenses
 Based on lean manufacturing
principles (cost can be reduced
and profitability
increased by improvements in
the manufacturing workflow)
 A company should meet two
criteria before choosing this:
o The nature of the
manufacturing process; suitable
only for companies
engaged in a manufacturing
process in which conversion
costs are fixed
costs and do not vary
proportionately with the units of
production
 Assembly-line and
continuous processes that are
highly
automated most likely to meet
this criterion
o Management favour cost
accounting info that is helpful
for short-term,
incremental analysis, such as
whether a company should
accept/reject a
special offer at a reduced sales
price
 Product costs are only direct
material costs
 Inventory is valued using only
direct material costs and all
other manufacturing
costs are treated as expenses in
the accounting period in which
they occur
 Throughput Contribution: the
difference between the revenues
and direct
material costs for the units sold
 The one major difference
between throughput costing and
variable costing is
that under throughput costing,
the direct labour and variable
MOH are charged
as an expense in the current
period. Therefore, they are not
deferred to future
periods through the ending
inventory

BUS 288
Chapter 8
Variable Costing
o Net income calculated is not
affected by changes in
production levels. As
a result, it is much easier to
understand the impact of fixed
and variable
costs on the calculation of net
income when variable costing is
used
o Net income calculated is
greatly affected by changes in
sales levels and it
therefore provides a more
realistic assessment of the
company’s success/
failure during a period
o Because the fixed and
variable components are shown
in the income
statement, it is easier to identify
these costs and understand their
effect
on the business
 Absorption costing 
allocation of fixed costs to
inventory makes
it difficult to evaluate the
impact of fixed costs on the
company’s
results
- Normal Costing: uses actual
direct manufacturing costs and
actual production units with
a predetermined OH rate
- Throughput Costing: also
called super-variable costing;
treats all costs as period
expenses except for direct
materials
 Modified form of variable
costing that treats direct labour
and variable MOH as
period expenses
 Based on lean manufacturing
principles (cost can be reduced
and profitability
increased by improvements in
the manufacturing workflow)
 A company should meet two
criteria before choosing this:
o The nature of the
manufacturing process; suitable
only for companies
engaged in a manufacturing
process in which conversion
costs are fixed
costs and do not vary
proportionately with the units of
production
 Assembly-line and
continuous processes that are
highly
automated most likely to meet
this criterion
o Management favour cost
accounting info that is helpful
for short-term,
incremental analysis, such as
whether a company should
accept/reject a
special offer at a reduced sales
price
 Product costs are only direct
material costs
 Inventory is valued using only
direct material costs and all
other manufacturing
costs are treated as expenses in
the accounting period in which
they occur
 Throughput Contribution: the
difference between the revenues
and direct
material costs for the units sold
 The one major difference
between throughput costing and
variable costing is
that under throughput costing,
the direct labour and variable
MOH are charged
as an expense in the current
period. Therefore, they are not
deferred to future
periods through the ending
inventory
BUS 288

Chapter 8

Variable Costing

o Net income calculated is not affected by changes in production levels. As

a result, it is much easier to understand the impact of fixed and variable

costs on the calculation of net income when variable costing is used

o Net income calculated is greatly affected by changes in sales levels and it

therefore provides a more realistic assessment of the company’s success/

failure during a period

o Because the fixed and variable components are shown in the income

statement, it is easier to identify these costs and understand their effect

on the business

 Absorption costing  allocation of fixed costs to inventory makes

it difficult to evaluate the impact of fixed costs on the company’s

results

- Normal Costing: uses actual direct manufacturing costs and actual production units with

a predetermined OH rate
- Throughput Costing: also called super-variable costing; treats all costs as period

expenses except for direct materials

 Modified form of variable costing that treats direct labour and variable MOH as

period expenses

 Based on lean manufacturing principles (cost can be reduced and profitability

increased by improvements in the manufacturing workflow)

 A company should meet two criteria before choosing this:

o The nature of the manufacturing process; suitable only for companies

engaged in a manufacturing process in which conversion costs are fixed

costs and do not vary proportionately with the units of production

 Assembly-line and continuous processes that are highly

automated most likely to meet this criterion

o Management favour cost accounting info that is helpful for short-term,

incremental analysis, such as whether a company should accept/reject a

special offer at a reduced sales price

 Product costs are only direct material costs

 Inventory is valued using only direct material costs and all other manufacturing

costs are treated as expenses in the accounting period in which they occur

 Throughput Contribution: the difference between the revenues and direct

material costs for the units sold

 The one major difference between throughput costing and variable costing is

that under throughput costing, the direct labour and variable MOH are charged

as an expense in the current period. Therefore, they are not deferred to future

periods through the ending inventory

BUS 288

Chapter 8

Variable Costing

o Net income calculated is not affected by changes in production levels. As

a result, it is much easier to understand the impact of fixed and variable

costs on the calculation of net income when variable costing is used

o Net income calculated is greatly affected by changes in sales levels and it

therefore provides a more realistic assessment of the company’s success/

failure during a period

o Because the fixed and variable components are shown in the income

statement, it is easier to identify these costs and understand their effect

on the business

 Absorption costing  allocation of fixed costs to inventory makes

it difficult to evaluate the impact of fixed costs on the company’s

results

- Normal Costing: uses actual direct manufacturing costs and actual production units with

a predetermined OH rate

- Throughput Costing: also called super-variable costing; treats all costs as period

expenses except for direct materials

 Modified form of variable costing that treats direct labour and variable MOH as

period expenses

 Based on lean manufacturing principles (cost can be reduced and profitability

increased by improvements in the manufacturing workflow)

 A company should meet two criteria before choosing this:

o The nature of the manufacturing process; suitable only for companies

engaged in a manufacturing process in which conversion costs are fixed

costs and do not vary proportionately with the units of production

 Assembly-line and continuous processes that are highly

automated most likely to meet this criterion

o Management favour cost accounting info that is helpful for short-term,

incremental analysis, such as whether a company should accept/reject a

special offer at a reduced sales price

 Product costs are only direct material costs

 Inventory is valued using only direct material costs and all other manufacturing

costs are treated as expenses in the accounting period in which they occur

 Throughput Contribution: the difference between the revenues and direct

material costs for the units sold

 The one major difference between throughput costing and variable costing is

that under throughput costing, the direct labour and variable MOH are charged

as an expense in the current period. Therefore, they are not deferred to future

periods through the ending inventory