CONCEPT SUMMARY

Monday, 28 August 2023 11:57 pm

VARIABLE AND ABSORPTION COSTING

Preparation of Statement of Profit and Loss

External Reporting
→ Conventional format AKA absorption costing p/l (total sales minus COS and expenses)
Internal Reporting
→ Contribution margin format AKA variable costing p/l

Distinction Between Product Cost and Period Cost

PRODUCT COST PERIOD COST
1. Inventoriable Yes No
2. Cost Flow Incurrence → Inventories → p/l Incurrence → p/l
3. Accounting Treatment Capitalized first Expensed outright
4. P/L Item Cost of goods sold Operating expenses
5. Principle (by matching principle) Cost and effect Immediate recognition

Variable Costing, Absorption Costing, Throughput Costing and Super Absorption Costing Compared

1. As to treatment of the various operating costs

VARIABLE ABSORPTION TRHROUGHPUT SUPER
COSTING COSTING COSTING ABSORPTION
COSTING
a. Direct Materials Product cost Product cost Product cost Product cost
b. Direct Labor - Variable Product cost Product cost Period cost Product cost
c. Factory Overhead
i. Variable Product cost Product cost Period cost Product cost
ii. Fixed Period cost Product cost Period cost Product cost
d. Selling and Administrative Expense
i. Variable Period cost Period cost Period cost Product cost
ii. Fixed Period cost Period cost Period cost provided it is
value adding
e. Use in Decision Making Internal External reporting Theory of Life cycle
reporting constraints (profit costing (looking
maximization) at the entire
profitability)

2. As to Net Operating Income and Inventory Levels

RELATIONSHIP NET INCOME INVENTORIES
BETWEEN Where:
PRODUCTION P - production
AND SALES S - sales
a. P=S AC=VC BE=BB AC - absorption costing
VC - variable costing
b. P>S AC>VC BE>BB
BE - balance end
c. P<S AC<VC BE<BB BB - balance beginning

3. As to Cost Segregation

Variable Costing → segregate costs according to behavior

Absorption Costing → segregate costs according to function

4. As to Presentation of Income Statement

Variable Costing → contribution margin income approach

Absorption Costing → conventional income statement
Throughput Costing → throughput contribution income statement

Nature and Treatment of Fixed Factory Overhead Costs

Four (4) Different Capacity Levels Used to Compute the Budgeted Fixed Manufacturing Cost Rate

Variable and Absorption Costing Page 1

 1. Theoretical Capacity → based on producing at full efficiency all the time
2. Practical Capacity → reduces theoretical capacity by considering unavoidable operating interruptions
3. Normal Capacity → satisfies average customer demand
4. Master-budget Capacity Utilization → what managers expect for the current period

Alternative Cost Methods in Allocation of Overhead to the Units Produced

1. Actual Cost Method → uses actual rates and quantities

2. Normal Cost Method → direct materials and direct labor - uses actual costs; factory overhead - uses predetermined factory overhead rates
3. Extended Normal Cost System or Flexible Budget → used to track production costs (budgeted costs multiply by actual quantity)
4. Standard Cost System or Static Budget → a tool for planning budgets, managing and controlling costs, and evaluating cost management performance

Variable and Absorption Costing Page 2