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Prof. Bless Bauzon, RMT, CPA, MBA

Fixed and Variable Cost Behavior
Illustrative Problem:
Caffe Expresso operates a number of espresso coffee stands
in busy suburban malls. The fixed weekly expense of a coffee
stand is $1,500 and the variable cost per cup of coffee served
is $0.19
 Café Expresso operates a number of espresso coffee stands
in busy suburban malls. The fixed weekly expense of a coffee
stand is $1,500 and the variable cost per cup of coffee served
is $0.19.
Required: Estimate the total costs and average cost
per cup of coffee at the indicated levels of activity.
Cups of Coffee Served in a Wk
Week 1 Week 2 Week 3
3,700 3,800 3,900
Fixed cost a $ 1,500 $ 1,500 $ 1,500
Variable cost
Total cost
Ave cost per cup of coffee
Café Expresso operates a number of espresso coffee stands in
busy suburban malls. The fixed weekly expense of a coffee
stand is $1,500 and the variable cost per cup of coffee served
is $0.19.
Required: Estimate the total costs and average cost
per cup of coffee at the indicated levels of activity.
Cups of Coffee Served in a Wk
Week 1 Week 2 Week 3
3,700 3,800 3,900
Fixed cost a $ 1,500 $ 1,500 $ 1,500
Variable cost bx 703
Total cost
Ave cost per cup of coffee
Variable cost (Week 1): $ 0.19 x 3,700 cups of coffee = $ 703
Café Expresso operates a number of espresso coffee stands in
busy suburban malls. The fixed weekly expense of a coffee
stand is $1,500 and the variable cost per cup of coffee served
is $0.19.
Required: Estimate the total costs and average cost
per cup of coffee at the indicated levels of activity.
Cups of Coffee Served in a Wk
Week 1 Week 2 Week 3
3,700 3,800 3,900
Fixed cost a $ 1,500 $ 1,500 $ 1,500
Variable cost bx 703 722
Total cost
Ave cost per cup of coffee
Variable cost (Week 2): $ 0.19 x 3,800 cups of coffee = $ 722
Café Expresso operates a number of espresso coffee stands in
busy suburban malls. The fixed weekly expense of a coffee
stand is $1,500 and the variable cost per cup of coffee served
is $0.19.
Required: Estimate the total costs and average cost
per cup of coffee at the indicated levels of activity.
Cups of Coffee Served in a Wk
Week 1 Week 2 Week 3
3,700 3,800 3,900
Fixed cost a $ 1,500 $ 1,500 $ 1,500
Variable cost bx 703 722 741
Total cost
Ave cost per cup of coffee
Variable cost (Week 3): $ 0.19 x 3,900 cups of coffee = $ 741
Café Expresso operates a number of espresso coffee stands in
busy suburban malls. The fixed weekly expense of a coffee
stand is $1,500 and the variable cost per cup of coffee served
is $0.19.
Required: Estimate the total costs and average cost
per cup of coffee at the indicated levels of activity.
Cups of Coffee Served in a Wk
Week 1 Week 2 Week 3
3,700 3,800 3,900
Fixed cost a $ 1,500 $ 1,500 $ 1,500
Variable cost bx 703 722 741
Total cost y=a + bx $ 2,203 $ 2,222 $ 2,241
Ave cost per cup of coffee
Café Expresso operates a number of espresso coffee stands in
busy suburban malls. The fixed weekly expense of a coffee
stand is $1,500 and the variable cost per cup of coffee served
is $0.19.
Required: Estimate the total costs and average cost
per cup of coffee at the indicated levels of activity.
Cups of Coffee Served in a Wk
Week 1 Week 2 Week 3
3,700 3,800 3,900
Fixed cost a $ 1,500 $ 1,500 $ 1,500
Variable cost bx 703 722 741
Total cost y=a + bx $ 2,203 $ 2,222 $ 2,241
Ave cost per cup of coffee $ 0.60
Ave cost per cup (Wk 1): $ 2,203 divided by 3,700 cups=$0.60
Café Expresso operates a number of espresso coffee stands in
busy suburban malls. The fixed weekly expense of a coffee
stand is $1,500 and the variable cost per cup of coffee served
is $0.19.
Required: Estimate the total costs and average cost
per cup of coffee at the indicated levels of activity.
Cups of Coffee Served in a Wk
Week 1 Week 2 Week 3
3,700 3,800 3,900
Fixed cost a $ 1,500 $ 1,500 $ 1,500
Variable cost bx 703 722 741
Total cost y=a + bx $ 2,203 $ 2,222 $ 2,241
Ave cost per cup of coffee $ 0.60 $ 0.58
Ave cost per cup (Wk 2): $ 2,222 divided by 3,800 cups=$0.58
Café Expresso operates a number of espresso coffee stands in
busy suburban malls. The fixed weekly expense of a coffee
stand is $1,500 and the variable cost per cup of coffee served
is $0.19.
Required: Estimate the total costs and average cost
per cup of coffee at the indicated levels of activity.
Cups of Coffee Served in a Wk
Week 1 Week 2 Week 3
3,700 3,800 3,900
Fixed cost a $ 1,500 $ 1,500 $ 1,500
Variable cost bx 703 722 741
Total cost y=a + bx $ 2,203 $ 2,222 $ 2,241
Ave cost per cup of coffee $ 0.60 $ 0.58 $ 0.57
Ave cost per cup (Wk 3): $ 2,241 divided by 3,900 cups=$0.57
Café Expresso operates a number of espresso coffee stands in
busy suburban malls. The fixed weekly expense of a coffee
stand is $1,500 and the variable cost per cup of coffee served
is $0.19.
Required: Estimate the total costs and average cost
per cup of coffee at the indicated levels of activity.
Cups of Coffee Served in a Wk
Week 1 Week 2 Week 3
3,700 3,800 3,900
Fixed cost $ 1,500 $ 1,500 $ 1,500
Variable cost 703 722 741
Total cost $ 2,203 $ 2,222 $ 2,241
Ave cost per cup of coffee $ 0.60 $ 0.58 $ 0.57
Predetermined Overhead Rate and CAPACITY

Left-over fries from

actual consumption
Considered as your
expense since you have
already paid for this
Predetermined Overhead Rate and CAPACITY

One Bottling Machine can pack 2,000 bottles in 1 day.

In one day, it had packed 1,900 bottles only.
The overhead cost assigned to the 100 bottles not
packed is considered as UNUSED CAPACITY.
Predetermined Overhead Rate and CAPACITY

Two assumptions:
1. All manufacturing overhead costs are fixed
2. The estimated, or budgeted, fixed manufacturing
overhead at the beginning of the period equals the
actual fixed manufacturing overhead at the end of the
period.
Predetermined Overhead Rate and CAPACITY
Illustrative Problem:
Secret, Inc., leases a piece of equipment for $100,000 per
year. If run at full capacity, the machine can produce 50,000
units per year. However, the company estimates that 40,000
units will be produced and sold next year.
POHR based on units produced and sold is:
Estimated overhead cost of $100,000
$2.50 per unit
Estimated volume of 40,000 units
Predetermined Overhead Rate and CAPACITY
Illustrative Problem:
Secret, Inc., leases a piece of equipment for $100,000 per
year. If run at full capacity, the machine can produce 50,000
units per year. However, the company estimates that 40,000
units will be produced and sold next year.
POHR based on units produced and sold is:
Estimated overhead cost of $100,000
$2.50 per unit
Estimated volume of 40,000 units
POHR based on capacity is:
Estimated overhead cost of $100,000
$2.00 per unit
Estimated capacity of 50,000 units
Predetermined Overhead Rate and CAPACITY
Problem: Secret, Inc., leases a piece of equipment for
$100,000 per yr. At full capacity, the machine can produce
50,000 units per yr. However, the company estimates that
40,000 units will be produced and sold next yr.
POHR based on capacity:
Estimated overhead cost of $100,000
$2.00 per unit
Estimated capacity of 50,000 units
Cost of Amount of Actual POHR
unused allocation Allocation based on
capacity base at Base Capacity
capacity
= (50,000 - 40,000) x $2.00 = $ 20,000
Reported as OTHER EXPENSE on the Income Statement
Managing the Cost of Unused Capacity
Treated as Treated as
PRODUCT COST in the vs. PERIOD COST in the
Absorption Approach Capacity-Based
Approach
Managers should respond by:
1. Seeking new business opportunities that consume the
capacity.
2. Cutting costs and shrinking the amount of available
capacity out to work in process, finished goods, and/or
cost of goods sold.
Traditional vs Contribution Format Income Statement
Illustrative Problem:
MyAussieGal Merchandising
has the following information:

Number of units sold 12,000

Selling price per unit $25
Variable selling expense per unit $2.50
Variable administrative expense per unit $2
Total fixed selling expense $16,000
Total fixed administrative expense $17,000
Inventory, beginning $25,000
Inventory, ending $18,000
Inventory purchases $101,000
 Number of units sold 12,000
Selling price per unit $25
Variable selling expense per unit $2.50
Variable administrative expense per unit $2
Total fixed selling expense $16,000
Total fixed administrative expense $17,000
Inventory, beginning $25,000
Inventory, ending $18,000
Inventory purchases $101,000
MyAussieGal Traditional Income Statement
Sales $ 25 per unit x 12,000 units $ 300,000
Cost of goods sold
Gross margin
Selling and administrative expenses:
Selling
Administrative
Net operating income
 Number of units sold 12,000
Selling price per unit $25
Variable selling expense per unit $2.50
Variable administrative expense per unit $2
Total fixed selling expense $16,000
Total fixed administrative expense $17,000
Inventory, beginning $25,000
Inventory, ending $18,000
Inventory purchases $101,000

MyAussieGal Traditional Income Statement

Sales $ 25 per unit x 12,000 units $ 300,000
Cost of goods sold $25,000 + 101,000
Gross margin
Selling and administrative expenses:
Selling
Administrative
Net operating income
 Number of units sold 12,000
Selling price per unit $25
Variable selling expense per unit $2.50
Variable administrative expense per unit $2
Total fixed selling expense $16,000
Total fixed administrative expense $17,000
Inventory, beginning $25,000
Inventory, ending $18,000
Inventory purchases $101,000

MyAussieGal Traditional Income Statement

Sales $ 25 per unit x 12,000 units $ 300,000
Cost of goods sold $25,000 + 101,000 -18,000 108,000
Gross margin $192,000
Selling and administrative expenses:
Selling
Administrative
Net operating income
 Number of units sold 12,000
Selling price per unit $25
Variable selling expense per unit $2.50
Variable administrative expense per unit $2
Total fixed selling expense $16,000 y= a + bx
Total fixed administrative expense $17,000
Inventory, beginning $25,000
Inventory, ending $18,000
Inventory purchases $101,000

MyAussieGal Traditional Income Statement

Sales $ 25 per unit x 12,000 units $ 300,000
Cost of goods sold $25,000 + 101,000 -18,000 108,000
Gross margin $192,000
Selling and administrative expenses:
Selling $16,000
Administrative
Net operating income
 Number of units sold 12,000
Selling price per unit $25
Variable selling expense per unit $2.50
Variable administrative expense per unit $2
Total fixed selling expense $16,000 y= a + bx
Total fixed administrative expense $17,000
Inventory, beginning $25,000
Inventory, ending $18,000
Inventory purchases $101,000

MyAussieGal Traditional Income Statement

Sales $ 25 per unit x 12,000 units $ 300,000
Cost of goods sold $25,000 + 101,000 -18,000 108,000
Gross margin $192,000
Selling and administrative expenses:
Selling $16,000+($2.50 x 12,000) $46,000
Administrative
Net operating income
 Number of units sold 12,000
Selling price per unit $25
Variable selling expense per unit $2.50
Variable administrative expense per unit $2
Total fixed selling expense $16,000
y= a + bx
Total fixed administrative expense $17,000
Inventory, beginning $25,000
Inventory, ending $18,000
Inventory purchases $101,000
MyAussieGal Traditional Income Statement
Sales $ 25 per unit x 12,000 units $ 300,000
Cost of goods sold $25,000 + 101,000 -18,000 108,000
Gross margin $192,000
Selling and administrative expenses:
Selling $16,000+($2.50 x 12,000) $46,000
Admin $17,000
Net operating income
 Number of units sold 12,000
Selling price per unit $25
Variable selling expense per unit $2.50
Variable administrative expense per unit $2
Total fixed selling expense $16,000
y= a + bx
Total fixed administrative expense $17,000
Inventory, beginning $25,000
Inventory, ending $18,000
Inventory purchases $101,000
MyAussieGal Traditional Income Statement
Sales $ 25 per unit x 12,000 units $ 300,000
Cost of goods sold $25,000 + 101,000 -18,000 108,000
Gross margin $192,000
Selling and administrative expenses:
Selling $16,000+($2.50 x 12,000) $46,000
Admin $17,000 +($2 x 12,000) 41,000 87,000
Net operating income
 Number of units sold 12,000
Selling price per unit $25
Variable selling expense per unit $2.50
Variable administrative expense per unit $2
Total fixed selling expense $16,000
Total fixed administrative expense $17,000
Inventory, beginning $25,000
Inventory, ending $18,000
Inventory purchases $101,000
MyAussieGal Traditional Income Statement
Sales $ 25 per unit x 12,000 units $ 300,000
Cost of goods sold $25,000 + 101,000 -18,000 108,000
Gross margin $192,000
Selling and administrative expenses:
Selling $16,000+($2.50 x 12,000) $46,000
Admin $17,000 +($2 x 12,000) 41,000 87,000
Net operating income $105,000
MyAussieGal Traditional Income Statement
Sales ($25 per unit x 12,000 units) $300,000
COGS ($25,000_101,000-18,000) 108,000 Variable costs
Gross margin 192,000
Selling and aministrative expenses Both
Selling ($16,000+($2.50 x 12,000)) $46,000
variable &
Admin ($17,000+($2 x 12,000)) 41,000 87,000
Net operating income $105,000 fixed costs
MyAussieGal Contribution Format Income Statement
Sales
Variable expenses:
Costs are
separated as to
variable and Contribution margin
fixed costs Fixed expenses:

Net operating income

MyAussieGal Traditional Income Statement
Sales ($25 per unit x 12,000 units) $300,000
COGS ($25,000_101,000-18,000) 108,000 PRODUCT
Gross margin 192,000 Costs
Selling and aministrative expenses
Selling ($16,000+($2.50 x 12,000)) $46,000 PERIOD
Admin ($17,000+($2 x 12,000)) 41,000 87,000 Costs
Net operating income $105,000
MyAussieGal Contribution Format Income Statement
Sales
Variable expenses:
Costs are
separated as to
variable and Contribution margin
fixed costs Fixed expenses:

Net operating income

MyAussieGal Traditional Income Statement
Sales ($25 per unit x 12,000 units) $300,000
COGS ($25,000_101,000-18,000) 108,000
Gross margin 192,000
Selling and aministrative expenses
Selling ($16,000+($2.50 x 12,000)) $46,000
Admin ($17,000+($2 x 12,000)) 41,000 87,000
Net operating income $105,000

MyAussieGal Contribution Format Income Statement

Sales ($25 per unit x 12,000) 300,000
MyAussieGal Traditional Income Statement
Sales ($25 per unit x 12,000 units) $300,000
COGS ($25,000_101,000-18,000) 108,000
Gross margin 192,000
Selling and aministrative expenses
Selling ($16,000+($2.50 x 12,000)) $46,000
Admin ($17,000+($2 x 12,000)) 41,000 87,000
Net operating income $105,000

MyAussieGal Contribution Format Income Statement

Sales ($25 per unit x 12,000) 300,000
Variable expenses:
COGS ($25,000+101,000-18,000) 108,000
Selling expenses ($2.50 x 12,000) 30,000
Admin expenses ($2 x 12,000) 24,000 162,000
Contribution margin 138,000
MyAussieGal Contribution Format Income Statement
Sales ($25 per unit x 12,000) 300,000
Variable expenses:
COGS ($25,000+101,000-18,000) 108,000
Selling expenses ($2.50 x 12,000) 30,000
Admin expenses ($2 x 12,000) 24,000 162,000
Contribution margin 138,000
Fixed expenses:
Selling expenses 16,000
Admin expenses 17,000 33,000
Net operating income 105,000
 FULL or ABSORPTION
VARIABLE COSTING
COSTING
Traditional Income Contribution Margin
Statement Income Statement
includes ALL
includes only
manufacturing costs
Product materials, labor,
(materials, labor,
Cost variable FOH but NOT
variable FOH & fixed
the FIXED FOH
FOH)
Fixed FOH A product cost A period cost
Net income differ because of the fixed FOH
Income distinguishes product distinguishes variable
statement costs from period costs from fixed costs
 PRODUCT COST COMPONENTS
Absorption Costing/ Variable Costing/
Traditional Income Contribution Format
Statement Income Statement
Direct Materials Direct Materials
Direct Labor Direct Labor
Variable FOH Variable FOH
Fixed FOH ̶
Product Cost Product Cost
 INCOME STATEMENT Product costs: DM, DL,
Absorption Costing Variable FOH & Fixed FOH
Sales Pxx
COGS xx SOLD UNSOLD
Gross Profit Pxx
COGS Inventory
I.S. B.S.
Selling expenses xx
Admin expenses xx Period Costs (I.S.)
Proft Pxx Product costs: DM,
Variable Costing DL, Variable FOH
Sales Pxx
Variable costs xx Period Costs:
Contribution margin Pxx Selling expenses
Fixed costs xx Administrative expenses
Fixed FOH
Profit Pxx
Expensed outright whether products are sold or unsold
During 2017, Wool Corporation’s production was equal to
its normal capacity of 1,000 units. It sold 900 units at
a price of P50 per unit.
Total Cost Cost per unit
Direct materials Total cost P12,000 P12
Direct labor divided by 10,000 10
Variable FOH 1,000 units 8,000 8
Fixed FOH = Cost /Unit 6,000 6
Variable Selling & Admin
expenses 4,500 *5
Fixed Selling & Admin P3,000 /1,000
expenses units 3,000 3
*Variable selling & admin Total Cost = P4,500 = P5
cost per unit: Units sold 900 units
 PRODUCT COST per UNIT
Absorption Variable
Costing Costing
Direct materials P12 P12
Direct labor 10 10
Variable FOH 8 8
Fixed FOH 6 ̶
Product cost per unit P36 P30

Difference in product cost per unit

is the fixed FOH per unit
Selling & Administrative costs, whether variable
or fixed, are NOT included in the PRODUCT
COST, but as PERIOD COSTS
 Income (Absorption Costing)
Sales (P50 x 900 units) P45,000
Less: COGS (P36 x 900 units) 32,400
Gross income P12,600
Inclusive of P6 Fixed FOH cost
Less:
Variable selling & admin (P5 x 900 units) P4,500
Fixed selling & admin 3,000 7,500
Income (Absorption Costing) P5,100
COGS carries the Fixed FOH cost per unit
Fixed FOH cost per unit of the UNSOLD units
are carried in the INVENTORY
 Income (Variable Costing)
Sales (P50 x 900 units) P45,000
Less: Variablecosts
COGS (P30 x 900 units) P27,000
Selling & admin (P5 x 900 units) 4,500 31,500
Contribution margin Inclusive of P6 Fixed FOH cost of the P13,500
Less: Fixed costs 900 sold & 100 unsold units
Fixed factory overhead P6,000
Fixed selling & admin expenses 3,000 9,000
Income (Variable Costing) P4,500

Total Fixed FOH is expensed outright

whether or not the units produced are sold
P5,100 (Absorption Costing) > P4,500 (Variable Costing)
Flow of Costs: Key Definitions
Raw Materials: include any of the
materials that go into the final product.

Work in process: partially

complete and require
further work before being
sold to customers.

Finished Goods: completed units of

the product for sale to customers.
Cost of goods manufactured: all
manufacturing costs associated with the
goods that were finished during the period.
Finished Goods

Inventory

Cost of Goods Sold

Flow of Costs: A Conceptual Overview
Job-Order Costing: The Flow of Costs
Ruger Corporation is a producer of gold and silver
commemorative medallions, and it worked on only two jobs
in April.
Job-Order Costing: The Flow of Costs
Ruger Corporation is a producer of gold and silver
commemorative medallions, and it worked on only two jobs
in April.
In April, the employee time
tickets (which provide hourly
summaries of each employee
activities throughout the day)
included $60,000 recorded for
direct labor & $15,000 for indirect
labor.
Work in Process
Beginning balance, April 1 $30,000
Raw Materials (DM) 50,000 Job A completed
Direct Labor 60,000 at $158,000
Applied Overhead 90,000
Total Work in Process $230,000 Job B incomplete
at $72,000

1,000 medallions were produced.

Work in Process
Beginning balance, April 1 $30,000
Raw Materials (DM) 50,000
Direct Labor 60,000
Applied Overhead 90,000
Total Work in Process $230,000
Transfer to Finished Goods (158,000)
Balance, April 30 $72,000
Selling Price of One Medallion:
Total Sales $225,000
divided by Quantity Sold 750
Selling Price of One Medallion: $300
Total Cost of Work in Process $158,000
divided by Quantity Produced 1,000
Unit Cost of one Medallion $158
multiplied by quantity sold x 750
Cost of Goods Sold $118,500
 Quick Check 1
Beginning raw materials inventory was
$32,000. During the month, $276,000 of raw
material was purchased. A count at the end
of the month revealed that $28,000 of raw
material was still present. What is the cost of
direct material used?
a. $276,000.
b. $272,000.
c. $280,000.
d. $2,000.
 Quick Check 1a
Beginning raw materials
inventory was $32,000.
During the month, $276,000
of raw material was
purchased. A count at the
end of the month revealed Beg. raw materials $ 32,000
that $28,000 of raw material
was still present. What is the + Raw materials
cost of direct material used? purchased 276,000
a. $276,000. = Raw materials available
for use in production $308,000
b. $272,000.
− Ending raw materials
c. Answer: $280,000. inventory 28,000
d. $2,000. = Raw materials used
in production $280,000
 Quick Check 2
Direct materials used in production totaled
$280,000. Direct labor was $375,000, and $180,000
of manufacturing overhead was added to production
for the month. What were total manufacturing costs
incurred for the month?
a. $555,000.
b. $835,000.
c. $655,000.
d. Cannot be determined.
 Quick Check 2a
Direct materials used in production totaled
$280,000. Direct labor was $375,000, and $180,000
of manufacturing overhead was added to production
for the month. What were total manufacturing costs
incurred for the month?
a. $555,000.
b. Answer: $835,000.
c. $655,000. Direct materials $280,000
d. Cannot be determined. + Direct labor 375,000
+ Mfg. overhead applied 180,000
= Mfg. costs incurred
for the month $835,000
 Quick Check 3
• Beginning work in process was $125,000.
Manufacturing costs added to production for the
month were $835,000. There were $200,000 of
partially finished goods remaining in work in
process inventory at the end of the month. What
was the cost of goods manufactured during the
month?
• a. $1,160,000.
• b. $910,000.
• c. $760,000.
• d. Cannot be determined.
 Quick Check 3a
• Beginning work in process was $125,000.
Manufacturing costs added to production for the
month were $835,000. There were $200,000 of
partially finished goods remaining in work in process
inventory at the end of the month. What was the cost
of goods manufactured during
Beginningthe
workmonth?
in
• a. $1,160,000. process inventory $125,000
+ Mfg. costs incurred
• b. $910,000. for the period 835,000
• c. Answer: $760,000.
= Total work in process
• d. Cannot be determined.
during the period $960,000
− Ending work in
process inventory 200,000
= Cost of goods
manufactured $760,000
 Quick Check 4
• Beginning finished goods inventory was $130,000.
The cost of goods manufactured for the month
was $760,000, and the ending finished goods
inventory was $150,000. What was the cost of
goods sold for the month?
– a. $20,000.
– b. $740,000.
– c. $780,000.
– d. $760,000.
 Quick Check 4a
• Beginning finished goods inventory was $130,000.
The cost of goods manufactured for the month
was $760,000, and the ending finished goods
inventory was $150,000. What was the cost of
goods sold for the month?
– a. $20,000.
– b. Answer: $740,000.
– c. $780,000.
– d. $760,000.

•$130,000 + $760,000 = $890,000

•$890,000 − $150,000 = $740,000