15 -1

Class Meeting 5

VARIABLE
COSTING

Riwayadi
 15 -2

FULL COSTING FOR FINANCIAL

/ ABSORPTION ACCOUNTING
TWO COSTING PURPOSE
KINDS OF
COSTING
FOR
VARIABLE MANAGEMENT
COSTING ACCOUNTING
PURPOSE
 15 -3

Variable
Variable costing
costing
assigns
assigns only
only variable
variable
manufacturing
manufacturing costs
costs to
to
the
the product.
product.
Direct materials
Direct labor
Variable overhead
 15 -4

Absorption
Absorption costing
costing assigns
assigns
all
all manufacturing
manufacturing costs
costs to
to
the
the product;
product; this
this adds
adds fixed
fixed
overhead
overhead to
to the
the formula.
formula.
Direct materials
Direct labor
Variable overhead
Fixed overhead
 FIXED OVERHEAD
FIXED OVERHEAD TREATMENT
TREATMENT IN
IN 15 -5

VARIABLE COSTING
VARIABLE COSTING
Fixed
Fixed FOH
FOH isis not
not part
part of
of product
product cost,
cost, but
but treated
treated as
as
period
period cost,
cost, why?
why? Because
Because fixed
fixed cost
cost isis associated
associated
with
with providing
providing thethe capacity,
capacity, no no correlation
correlation to to
production
production activity.
activity. Whether
Whether or or not
not produce
produce the the
product,
product, the
the fixed
fixed cost
cost still
still occur.
occur.

FixedFOH
Fixed FOHcost
costisistreated
treatedasasproduct
productcost
costin
infull
fullcosting
costingbecause
because
financialaccounting
financial accountingdefines
definesthe
theproduct
productcost
costisisthat
thatall
allcosts
costs
directlyor
directly orindirectly
indirectlyrelated
relatedto
toproduce
producethetheproduct.
product.Hiring
Hiringthethe
productionmanager,
production manager,and andhaving
havingfactory
factorybuilding
buildingisisindirectly
indirectly
aimedto
aimed toproduce
producethe theproduct.
product.So,
So,all
allcosts
costsrelated
relatedto
tothese
these
resources(production
resources (productionmanager’s
manager’ssalaries,
salaries,depreciation
depreciationexpense,
expense,
maintenanceexpense,
maintenance expense,and andproperty
propertytaxtaxof
offactory
factorybuilding)
building)
shouldbe
should beaapart
partof
ofproduct
productcost
cost
 15 -6

LIMITATION OF VARIABLE COSTING

1. Can not be used for external reporting
because not follow the GAAP / IFRS
2. It is not easy to classify cost into fixed and
variable

ADVANTAGE OF VARIABLE COSTING

It will facilitate the manager to make profit
planning
 Format of income statement using 15 -7

variable costing
Sales xxx
Variabel expenses (xxx)
Contribution margin xxx
Fixed expenses (xxx)
Net income from operation xxx
Format of income statement using full
15 -8

costing
Sales xxx
Cost of goods sold (xxx)
Gross profit xxx
Operating expenses (xxx)
Net income from operation xxx
 15 -9

Inventory Valuation
Units in beginning inventory ---
Units produced 10,000
Units sold ($300 each) 8,000
Normal volume 10,000

Variable cost per unit:

Direct materials $ 50
Direct labor 100
Variable overhead 50
Variable selling and administrative 10
 15 -10

Fixed costs:
Fixed overhead $250,000
Fixed selling and administrative 100,000
Required:
1. Determine cost per unit using variable and
absorption costing
2. Prepare income statement using variable and
absorption costing
3. Analyze the cause of net income difference
 15 -11
1) Unit
Unit Cost
Cost
Variable Absorption
costing costing
Direct materials $ 50 $ 50
Direct labor 100 100
Variable overhead 50 50
Fixed overhead 25

$250,000
$250,000
10,000
10,000
 15 -12

Unit
Unit Cost
Cost
Variable Absorption
costing costing
Direct materials (V) $ 50 $ 50
Direct labor (V) 100 100
Variable overhead 50 50
Fixed overhead 25
Total $200 $225
 2) 15 -13

Fairchild Company
Variable-Costing Income Statement
Sales (8.000 x $ 300) $2,400,000
Less variable expenses:
Variable cost of goods sold
(8.000 x $ 200) $1,600,000
Variable selling and admin
(8.000 x $ 10. 80,000 1,680,000
Contribution margin (8.000 x $ 90*) 300- 210 $ 720,000
Less fixed expenses:
Fixed overhead $ 250,000
Fixed selling and admin. 100,000 350,000
Net income $ 370,000
 15 -14

Fairchild Company
Absorption-Costing Income Statement
Sales $2,400,000
Less: Cost of goods sold (8.000 x $225 1,800,000
Gross margin $ 600,000
Less: Selling and administrative exp.
Variable: 8.000 x $ 10 $ 80,000
Fixed 100,000 180,000
Net income $ 420,000
 15 -15

3)
NI – variable costing $ 370.000
NI – full/absorption costing 420.000
Difference in NI $ 50.000
This difference is caused by treatment difference in fixed FOH
Cost
Full costing: fixed FOH in ending FG inventory (10.000 – 8.000
=2.000 unit x $ 25 = $ 50,000) is carried over to next period.
Or Fixed FOH as period cost is $ 200.000 ($250,000 - $ 50,000),
or 8.000 units sold x $ 25 = $ 200.000 (fixed FOH in COGS)
Variable costing: all fixed FOH as period cost ($ 250,000)
 15 -16
EXAMPLE 1
 In the second year, production was 10.000 units,
sales was 12.000 units, what is the difference
between operating income full costing and operating
income variable costing without preparing income
statement and which one is higher?
Example 2
 If the units produced equal to units sold, what is the
difference between full costing net income and
variable costing net income
 for example: Units produced: 10.000

 Units sold: 10.000

 15 -17

Production,
Production, Sales,
Sales, and
and
Income
Income Relationships
Relationships
If Then
Production > Sales Absorption NI > Variable NI
Production < Sales Absorption NI < Variable NI
Production = Sales Absorption NI = Variable NI
 Exercise 15 -18

Cost per unit:

 DRMC $ 10
 DLC $ 8
 FOH –V $ 7
 FOH – F $ 5 or in total $ 25,000 for year
 Selling and administrative – V $ 6 per unit sold
 Selling and administrative for year $ 15,000
a. If production is 5.000 units and sales 3.000 units, what is difference between full
costing NI and Variable Costing NI
b. If full costing NI is $ 10.000, what is the variable costing NI?
c. Determine the price per unit?
 15 -19

Example

Data for Belnip, Inc., for years 2002, 2003, and 2004
follows:
Variable cost pr unit:
Direct materials $4.00
Direct labor 1.50
Variable overhead (estimated and
actual) 0.50
Variable selling and administrative 0.25
Estimated
Estimatedfixed
fixedoverhead
overheadwas
was$150,000
$150,000each
eachyear.
year. Normal
Normal
production
productionwas
was150,000
150,000units
unitsand
andthe
thesales
salesprice
pricewas
was$10.
$10.
Fixed
Fixedselling
sellingand
andadministrative
administrativeexpenses
expenseswere
were$50,000.
$50,000.
 15 -20

Required:
1. Determine the unit cost using full costing and
variable costing
2. Prepare income statement using full costing and
variable costing if sales for 2002, 2003, and 2004
were 100.000 units, 200,000 units, and 150.000
units respectively
3. Analyze the difference in NI
 15 -21

1)
full costing variable costing
RM cost per unit $4 $4
DL cost per unit 1.5 1.5
Variable FOH per unit 0.5 0.5
Fixed FOH per unit
($150,000/150,000 units) 1 -
Total unit cost of product $7 $6
 15 -22
Variable costing Net Income
2002 2003 2004
Sales 1.000.000 2.000.000 1.500.000
Variable cost:
COGS: (600.000) (1.200.000) (900.000)
Selling & Adm. (25.000) ( 50,000)( 37,500)
Total Var. Cost (625,000) (1,250,000) (937,500)
CM 375,000 750,000 562,500
Fixed cost:
Fixed FOH (150.000) (150,000) (150,000)
Fixed selling & Adm (50,000) ( 50,000) ( 50,000)
Total Fixed cost (200,000) (200,000) (200,000)
NI 175,000 550,000 362,500
 15 -23
FULL COSTING INCOME STATEMENT
2002 2003 2004
Sales 1.000.000 2.000.000 1.500.000
COGS (700,000) (1.400,000) (1,050,000)
Gross Profit 300,000 600,000 450,000
Selling & Adm:
Variable: (25.000) ( 50,000) ( 37,500)
Fixed (50,000) ( 50,000) ( 50,000)
Total (75,000) (100,000) (87,500)
NI 225,000 500,000 362,500
 15 -24

Variable-Costing
Variable-Costing Income
Income Statement
Statement
2002 2003 2004
Sales $1,500.00 $1,000 $2,000
Less variable expenses: -900.00
Variable cost of goods sold -87.50 -600 -1,200
Variable selling and admin. $ 562.50 -25 -50
Contribution margin -150.00 $ 375 $ 750
Less fixed expenses:
Fixed overhead -150 -150
Fixed selling and admin. -50 -50
Net income -0.50 $ 367 $ 550
$ 367.50
 15 -25

Absorption-Costing
Absorption-Costing Income
Income Statement
Statement
2002 2003 2004
Sales $1,500.00 $1,000 $2,000
Less: Cost of goods sold -1,050.00 700 1,400
Gross margin $ 450.00 $ 300 $ 600
Less: Selling and admin. exp. 87.50 75 100
Net income $ 362.50 $ 225 $ 500
 15 -26

Absorption
Absorption costing
costing income
income –– Variable
Variable
costing
costing income
income == Fixed
Fixed overhead
overhead xx (Units
(Units
produced
produced –– Units
Units sold)
sold)

2004
2004

$500,000
$500,000 –– $550,000
$550,000 == $1
$1 xx
(150,000
(150,000 –– 200,000)
200,000)
 15 -27

If income performance is expected to reflect

managerial performance, then managers have the
right to expect--
1. As sales revenue increases from one period to the
next, all other things being equal, income should
increase.
2. As sales revenue decreases from one period to
the next, all other things being equal, income
should decrease.
3. As sales revenue remains unchanged from one
period to the next, all other things being equal,
income should remain unchanged.
 15 -28

Segment
Segment Reporting
Reporting
Elcom, Inc.
Income Statement, 2004
Absorption-Costing Basis
Stereos Video Recorders Total
Sales $400,000 $290,000 $690,000
Less: Cost of goods sold 350,000 300,000 650,000
Gross margin $ 50,000 $ -10,000 $ 40,000
Less: Selling and
administrative exp. 30,000 20,000 50,000
Net income or loss $ 20,000 $ -30,000 $ -10,000
 Elcom, Inc. 15 -29
Income Statement, 2004
Variable-Costing Basis
Stereos Video Recorders Total
Sales $400,000 $290,000 $690,000
Less variable expenses:
Variable C of GS -300,000 -200,000 -500,000
Variable S & A -5,000 -10,000 -15,000
Contribution margin $ 95,000 $ 80,000 $175,000
Less direct fixed exp.:
Direct fixed overhead -30,000 -20,000 -50,000
Direct S & A -10,000 -5,000 -15,000
Segment margin $ 55,000 $ 55,000 $110,000
Less common fixed exp.:
Common fixed OH -100,000
Common S & A -20,000
Net income or loss $-10,000
 15 -30

Barton,
Barton, Inc.
Inc.
Profit for
Chain Stores
Sales $4,725,000
Less: Discounts 393,750
Net sales $4,331,250
Less: Cost of goods sold 2,520,000
Gross profit $1,811,250
Less: Shelf space -112,500
Shipping -157,500
EDI -100,000
Profit $1,441,250
 15 -31

Barton,
Barton, Inc.
Inc.
Profit for
Independent Toy Stores

Sales $2,625,000
Less: Cost of goods sold 1,400,000
Gross profit $1,225,000
Less: Commissions -131,250
Special packaging -35,000
Profit $1,058,750
 15 -32

Barton,
Barton, Inc.
Inc.
Profit for Fairs
Sales $150,000
Less: Cost of goods sold 80,000
Gross profit $ 70,000
Less: Fair expense -75,000
Design time -2,100
Setup -1,000
Loss $ -8,100
 15 -33

Exercise 1
Unit variable costs are as follows:
DRMC $ 50
DLC 30
Variable FOH 20
Variable selling and administrative expenses 10
Fixed costs per year are as follows:
Fixed FOH $ 7.500.000
Fixed selling and administrative expenses $ 2.500.000
Other information:
Production for year 250.000 units
Sales for year 200.000 units
Required:
1.If variable costing net income was $ 2.000.000, determine full costing net
income without preparing income statement?
2. determine selling price per unit?
3.If production for year was 300.000 units and sales were 320.000 unit,
Prepare full costing and variable costing net income using selling price per
unit on question 2 above and FIFO method.