Professional Documents
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Direct materials
Direct labor Product costs
Product costs Variable mfg. overhead
8-5
Absorption and Variable Costing
Absorption Variable
Costing Costing
Direct materials
Direct labor Product costs
Product costs Variable mfg. overhead
8-7
Absorption and Variable Costing
Unit product cost is determined as follows:
Absorption Variable
Costing Costing
Direct materials, direct labor, and
variable mfg. overhead $ 10 $ 10
Fixed mfg. overhead
($150,000 ÷ 25,000 units) 6 -
Unit product cost $ 16 $ 10
Absorption Costing
Sales (20,000 × $30) $ 600,000
Less cost of goods sold:
Beginning inventory
Add COGM
Goods available for sale
Ending inventory
Gross margin
Less selling & admin. exp.
Variable
Fixed
Net income
8-9
Absorption Costing Income Statements
8-10
Absorption Costing Income Statements
8-11
Variable Costing Income Statements
Now let’s look at variable costing by Mellon Co.
Variable Costing
Sales (20,000 × $30) $ 600,000
Less variable expenses:
Beginning inventory $ -
Add COGM
Goods available for sale
Ending inventory
Variable cost of goods sold
Variable selling & administrative
expenses
Contribution margin
Less fixed expenses:
Manufacturing overhead
Selling & administrative expenses
Net income
8-12
Variable Costing Income Statements
Now let’s look at variable costing by Mellon Co.
We exclude the
fixed manufacturing
Variable Costing
Sales (20,000 × $30) $ 600,000
Less variable expenses:
overhead.
Beginning inventory $ -
Add COGM (25,000 × $10) 250,000
Goods available for sale $ 250,000
Ending inventory (5,000 × $10) 50,000
Variable cost of goods sold $ 200,000
Variable selling & administrative
expenses
Contribution margin
Less fixed expenses:
Manufacturing overhead
Selling & administrative expenses
Net income
8-13
Variable Costing Income Statements
Now let’s look at variable costing by Mellon Co.
Variable Costing
Sales (20,000 × $30) $ 600,000
Less variable expenses:
Beginning inventory $ -
Add COGM (25,000 × $10) 250,000
Goods available for sale $ 250,000
Ending inventory (5,000 × $10) 50,000
Variable cost of goods sold $ 200,000
Variable selling & administrative
expenses (20,000 × $3) 60,000 260,000
Contribution margin $ 340,000
Less fixed expenses:
Manufacturing overhead $ 150,000
Selling & administrative expenses 100,000 250,000
Net income $ 90,000
8-14
Reconciling Income Under Absorption
and Variable Costing
We can reconcile the difference between absorption
and variable net income as follows:
8-16
Mellon Co. Year 2
In its second year of operations, Mellon Co. started with
an inventory of 5,000 units, produced 25,000 units, and
sold 30,000 units at $30 each.
Number of units produced annually 25,000
Variable costs per unit:
Direct materials, direct labor
and variable mfg. overhead $ 10
Selling & administrative
expenses $ 3
Fixed costs per year:
Mfg. overhead $ 150,000
Selling & administrative
expenses $ 100,000
8-17
Mellon Co. Year 2
Unit product cost is determined as follows:
Absorption Variable
Costing Costing
Direct materials, direct labor,
and variable mfg. overhead $ 10 $ 10
Fixed mfg. overhead
($150,000 ÷ 25,000 units) 6 -
Unit product cost $ 16 $ 10
8-19
Mellon Co. Year 2
Absorption Costing
Sales (30,000 × $30) $ 900,000
Less cost of goods sold:
Beg. inventory (5,000 x $16) $ 80,000
Add COGM (25,000 × $16) 400,000
Goods available for sale $ 480,000
Ending inventory - 480,000
Gross margin $ 420,000
Less selling & admin. exp.
Variable (30,000 × $3) $ 90,000
Fixed 100,000 190,000
Net income $ 230,000
Variable Costing
Sales (30,000 × $30) $ 900,000
Less variable expenses:
Beg. inventory (5,000 × $10) $ 50,000
Add COGM (25,000 × $10) 250,000
Goods available for sale $ 300,000
Ending inventory -
Variable cost of goods sold $ 300,000
Variable selling & administrative
expenses (30,000 × $3) 90,000 390,000
Contribution margin $ 510,000
Less fixed expenses:
Manufacturing overhead $ 150,000
Selling & administrative expenses 100,000 250,000
Net income $ 260,000
8-22
Evaluation of Variable Costing
Emphasizes contribution in
Advantages short-run pricing decisions.
External reporting
and income tax law
require absorption costing.
8-24
Costs of Assuring Quality
Grade Quality
Grade refers to the
extent of its Quality of design refers
capabilities in to how well it is conceived
or designed for its
performing an intended use.
intended purpose, in Quality of conformance
relation to other refers to the extent to
products with the which a product meets
same functional use. the specification of its
design.
8-25
There are four types of quality
costs.
Prevention costs are the costs of preventing
defects.
8-27
Costs of Environmental
Sustainability
Sustainable development includes business activity
that produces the goods and services needed in the
present without limiting the ability of future
generations to meet their meets.
Environmental costs are the costs of dealing with
environmental issues, such as BP’s costs in cleaning up
the company’s spill in the Gulf of Mexico.
Environmental cost management is the strategic
implantation of systems for identifying, measuring,
controlling, and reducing the private environmental
costs borne by a company or other organization.
8-28
Environmental costs may be
categorized in several ways:
Private environmental costs are those borne by a
company or individual. Social environmental costs
are those borne by the public at large.
Visible environmental costs are those that are
known and clearly identified as tied to
environmental issues. Hidden social environmental
costs cannot be clearly tied to environmental issues.
8-29
Visible and hidden environmental costs may be further
classified into one of three types.
Monitoring costs include the costs of monitoring the
regulatory environmental as well as monitoring the
production process to determine if pollution is being
generated.
Abatement costs include costs to reduce or eliminate
pollution.
Remediation costs include on-site and off-site remediation
costs. On-site remediation includes costs of reducing or
preventing the discharge into the environment of pollutants
that have been generated in the production process. Off-
site remediation includes the costs of reducing or eliminating
pollutants from the environment after they have been
discharged.
8-30