Absorption &

Variable Costing
is statement of comprehensive income
Focus on

for a manufacturing company

Net income 1 Net loss

ALFRED LINDON F. BERBANO

 ABSORPTION COSTING Classify cost ace to function

manufacturing
materials

¥ labor Iad
(also called conventional/traditional costing)
whether
on .

or

selling exp
operating cost
y 68 A

- costing method that includes all

manufacturing costs (direct materials, direct
labor, and both variable and fixed
manufacturing overhead) in the cost of a unit
of product. It treats fixed manufacturing
overhead as a product cost.
 cost part of manuf cost

VARIABLE COSTING
→
Product
unsold =
inventory
asset to cost behavior
classified according
variable
(also called direct costing)
Period cost →
fixed or

operating cost

- costing method that includes only variable

manufacturing costs (direct materials, direct
labor, and variable manufacturing overhead) in
the cost of a unit of product. It treats fixed
manufacturing overhead as a period cost.
units ✗
product cost
/ unit
 Forms part of inventory

PERIOD COST PRODUCT COST

P Exp
-
considered as Asset
-
cost as expense fine
whether sold or unsold

1. Refers to an item charged 1. Refers to an item included in

against current revenue on the product costing which is
basis of time period regardless apportioned between the 0 sold of

and@ unsold units.

↳ part
expense
of the difference between ↳inventory
coos

production and sales volume. 2. The portion of the cost, which

2. Does not form part of the cost of has been allocated to the unsold
inventory. units, becomes part of the
3. Diminishes income for the inventory.
current period by its full 3. Diminishes current income by
amount. that portion thereof identified
with the sold units only with the
remainder being deferred to the
next accounting period as part
of the cost of ending inventory.
PRINCIPAL DIFFERENCES BETWEEN VARIABLE & CONVENTIONAL ABSORPTION COSTING

ABSORPTION VARIABLE
COSTING COSTING

1. Cost segregation Seldom segregates Costs are segregated

costs into variable & into variable & fixed
fixed costs. costs.

2. Cost of inventory Cost of inventory Cost of inventory

includes all the includes only the
manufacturing costs: variable
materials, labor, manufacturing costs:
VFOH & FFOH. materials, labor, and
VFOH.

3. Treatment of fixed FFOH is treated as FFOH is treated as

factory overhead
-
product cost. o period cost.
 PRINCIPAL DIFFERENCES BETWEEN VARIABLE & CONVENTIONAL ABSORPTION COSTING

AC

sales
ABSORPTION COSTING VARIABLE COSTING
material
E Labor of
sales
-

cos v04
you - part -
variable WS

GP ←
Selling Mfg margin
-
OE 69€ -

exp
V Sta
NF OM I
Fixed
selling
-
Fixed cost GI expense
↳ treated right away
as an expense

4. Income Distinguishes between Distinguishes between

statement production and other costs. variable and fixed costs.

5. Net income Net income between the two methods may differ from each
other because of the difference in the amount of FFOH
recognized as expense during an accounting period. This
is due to variations between sales and production. In the
long run, however, both methods give the same results
since sales cannot continuously exceed production, nor
production can continuously exceed sales.
 Production = Sales
When production is equal to sales, inventory is
•
zero. FOH expensed under AC = FOH expensed
Difference under VC. Therefore, AC income = VC income.
in
Production > Sales
Net Income When production is > sales, there is an increase in
inventory. FOH expensed under AC is < FOH Less than

NI >
expensed under VC. Therefore, AC income is > VC
LAC
income.
=
=
YC AU in VC
Income in is higher than

I s
=

Production < Sales

When production is < sales, there is an decrease in
inventory. FOH expensed under AC is > FOH
expensed under VC. Therefore, AC income is < VC
income. AC
Income is lower than
in in VC
 DIFFERENCE IN NET INCOME

❖ The difference in net income is actually attributed to the treatment

of the fixed factory overhead (FFOH).
❖ Under AC method, FFOH is treated as a product cost while under VC
method, FFOH is treated as a period cost.
❖ If the inventory is unsold, using the AC method, the FFOH becomes
part of the inventory
= (ASSET). Whereas, under VC method it is part
of the expenses.
 COMPUTATION OF FIXED FACTORY OVERHEAD PER UNIT

PIE?¥Y given
"
""
=

*N
yin
"
+ 9 convert to in units
is
Kaya we

Total FFOH in peso XX

Divided by: Normal capacity XX
FFOH/unit * XX
Product cost in AC

vo
Ya L
,
ve
TF FOH ly
*In the absence of normal capacity, use actual production. VC

✗
PC /U
/ units
That is , the company operated 100% of normal capacity. PCTU
ending
tender
inv ✓

ending inv in
peso end inv
 COMPUTATION OF VOLUME VARIANCE

Normal capacity in units XX

Less: Actual production XX
Volume variance *
= XX

*presented only under the absorption costing method

RECONCILIATION
FOR
DIFFERENCE IN AC Net Income XX
NET INCOME Less: VC Net income XX
Difference in Net Income XX
Sales
If hindi binaggithm prod
Production Ending Inv
- -

Beg Inu
Sales

b in
units
☐ / in units ✗ From

↳ difference 0 in net income

✗
FFOH 14

4 in net income
↳
difference
ACCOUNTING Production XX
FOR Less: Sales XX
DIFFERENCE Change in inventory XX
X FFOH cost per unit XX
Difference in Net Income XX
THANK YOU!
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