Period Cost Product Cost

Product costing: Absorption, Variable and Throughput -Cost that is charged against
Costing current revenue during a
time period regardless of the
☛Absorption costing difference between
production and sales
 also called full costing or conventional costing volumes.
 A product costing method that includes all manufacturing costs (direct
materials, direct labor and both variable and fixed overhead) as product
costs. -Does not form part of the
cost of inventory
 Presents nonmanufacturing costs on the income statement according to
functional areas.
 Under this method, fixed factory overhead is treated as a product cost.
-Cost that is included in the
computation of product cost
that is apportioned between
the sold and unsold units.
-An inventoriable cost. The
portion of the cost that has
been allocated to the unsold
units becomes part of the cost
of inventory.

☛Variable costing -Diminishes income for the -Diminishes current income by

current period by its full the portion allocated to the
 Also called direct costing, marginal costing or contribution margin amount. sold units; the portion
reporting. allocated to unsold units is
 A product costing method that includes only variable costs of production treated as an asset, being part
(direct materials, direct labor, and variable manufacturing overhead) as of the cost of inventory
product costs.
 Presents both nonmanufacturing and manufacturing costs on the income
VARIABLE COSTING: ARGUMENTS
statement according to cost behavior. FOR AGAINST
 Under this method, fixed factory overhead is treated as a period cost. *Reports are simpler and more *Segregation of costs into
understandable fixed and variable might be
PRODUCT COST COMPONENTS *Applicable for break-even and difficult
CVP analysis *Matching principle is
Absorption Costing Variable Costing *Problems involved in allocating violated for it excludes fixed
Direct materials Direct materials fixed costs are eliminated OH from product costs
+ Direct labor + Direct labor *More compatible with *Inventory costs and other
+ Variable OH + Variable OH standard cost accounting system related accounts, such as
+ Fixed OH --- *Reports provide useful working capital, current
----------------------- ----------------------- information for pricing decisions ratio, and acid-test ratio, are
and other decision-making understated because of the
Product Cost Product Cost
problems encountered by exclusion of fixed OH in the
mgmt. computation of product
costs.
DISTINCTIONS BETWEEN PERIOD COSTS AND PRODUCT COSTS
 Absorption Variable
1.Cost Seldom segregate costs Costs are segregated
segregation into variable and fixed into variable and fixed VC Fixed OH expense
2.Cost of Includes all the Includes only VARIABLE is < than AC > than AC equal to AC
inventory manufacturing costs manufacturing costs
3.Treatmen Treated as PRODUCT Treated as PERIOD
VC Operating Income
t of Fixed COST COST
OH is > than AC < than AC equal to AC
4.Income Distinguishes between Distinguishes between
statement production and other variable and fixed costs
costs S XX
S XX -VC XX
-CGS XX CM XX
Gross profit XX -Fixed costs XX
-S&A costs XX Profit XX
Profit XX
5.Net Net Income between the two methods may differ
Income from each other because of the difference in the
amount of fixed OH costs recognized as expense o Absorption costing income follows production; that is:
during an accounting period. This is due to
variations between sales and production. In the
long run, however, both methods give Table 2: Absorption Costing
substantially the same results since sales cannot
continually exceed production, nor production If
can continuously exceed sales.
 Therefore, P>S P<S P=S
no change
Sales and variable costing, production and absorption costing. (Which AC Operating Income Increases Decreases (ceteris paribus)
follows which?)
o Variable costing income follows sales; that is: Inventory Increases Decreases no change
< than
Table 1: Variable Costing AC Fixed OH expense is VC > than VC equal to VC
> than
If
AC Operating Income is VC < than VC equal to VC
 Therefore, S>P S<P S=P Let P=Production
no change S= Sales
(ceteris AC=Absorption Costing
VC Operating Income Increases Decreases paribus) VC=Variable Costing
Inventory Decreases Increases no change
RECONCILIATION OF ABSORPTION AND VARIABLE COSTING INCOME FIGURES
 e. While variable costing neither rewards nor penalizes production that is higher or
Absorption costing income XX lower than sales, throughput costing penalizes high production and rewards low
Add: Fixed OH in the beginning inventory XX production. Throughput costing is therefore very much in tune with JIT and other
Total XX philosophies that seek lower inventories.
Less: Fixed OH in the ending inventory XX
Variable costing income XX 2. SUPERABSORPTION COSTING- treats costs from all links in the value chain as
inventoriable costs.
ACCOUNTING FOR DIFFERENCE IN INCOME
 [NOTE:]When Production>Sales: Throughput income<Variable
income<Absorption income.
Change in inventory (Production less Sales) XX
X Fixed FOH cost per unit XX When Sales>production: Throughput income>Variable
Difference in income XX income>Absorption income.

Once a company has reduced inventories to near zero: Throughput

STANDARD COSTS UNDER ABSORPTION AND VARIABLE COSTING
income=Variable income=Absorption income.

1. COGS is computed at standard

2. Standard COGS is adjusted to actual costs by adding unfavorable ☛Treatment of costs variance
variances and/or deducting favorable variances
Cost variance
3. In absorption costing, both variable and fixed manufacturing cost
variances are used as adjustment to the std. COGS  The difference between actual and standard amounts.
4. In variable costing, only the variable manufacturing cost variances are
used as adjustments to the std. COGS. Variance Treatment
Actual costs > standard Unfavorable Added to cost of goods sold at
THE EXTREMES costs variance standard/ deducted from operating
income
1. SUPERVARIABLE COSTING OR THROUGHPUT COSTING- treats direct materials as Actual costs< standard Favorable Deducted from cost of goods sold
the only variable costs. costs variance at standard/ added to operating
income
☛FEATURES:
a. Only material costs are inventoried; work-in process or finished goods inventories
are not recorded
b. Treats all direct labor and manufacturing OH costs as period costs, expensing
them as they are incurred.
c. COGS is the cost of materials put into process.
d. Sales – COGS= Throughput in TOC parlance
 - Actual capacity in unit’s xx
Volume variance in unit’s xx
X standard fixed costs per unit xx
Volume variance in pesos xx

Variance Treatment
Normal capacity > actual unfavorable Added to cost of goods
capacity sold at standard or
deducted from operating
income
Normal capacity < actual favorable Deducted from cost of
capacity goods sold at standard or
added to operating income

Volume variance
 applicable only in the absorption costing
 Happens when the normal capacity is not equal to the actual
capacity.
Normal capacity
 The average level of activity over a long period or over the
budgeting period.

Computation of volume variance:

Normal capacity in units’ xx