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Absorption Variable Costing 11082021 112913am
Absorption Variable Costing 11082021 112913am
Management
Learning Objectives
• Explain how variable costing differs from absorption costing
• Compute the unit product cost under each method
• Prepare income statements using variable and absorption
costing, and reconcile the two income figures
• Describe how fixed overhead costs are deferred in, and
released from, inventory under absorption costing
• Explain the advantages and limitations of variable and
absorption costing
• Prepare a segmented income statement and use it.
• Compute companywide and segment break-even points.
• Prepare income statements using super-variable costing and
reconcile this approach with variable costing.
Variable Vs. Absorption Costing
Variable Absorption
Costing Costing
Direct Materials
Product
Direct Labor Product
Costs
Variable Manufacturing Overhead Costs
Fixed Manufacturing Overhead
Period
Variable Selling and Administrative Expenses Period
Costs
Fixed Selling and Administrative Expenses Costs
Quick Test
Absorption Variable
Costing Costing
Direct materials, direct labor,
and variable mfg. overhead $ 40 $ 40
Fixed mfg. overhead
($1000,000 ÷ 40,000 units) 25 -
Unit product cost $ 65 $ 40
Absorption Variable
Costing Costing
Direct materials, direct labor,
and variable mfg. overhead $ 40 $ 40
Fixed mfg. overhead
($1000,000 ÷ 40,000 units) 25 -
Unit product cost $ 65 $ 40
Year 2:
Ending inventory 195,000 120,000
Beginning inventory 325,000 200,000
Change in inventory $ (130,000) - $ (80,000) = $ (50,000)
Reconciliation
Alternatively, we can reconcile the differences
between absorption and variable income as follows:
Variable costing net income $ 600,000
Add: Fixed mfg. overhead costs
deferred in inventory
(5,000 units × $25 per unit) 125,000
Absorption costing net income $ 725,000
production
tends to equal
sales . . .
R e g u la r B ig S c r e e n
U .S . S a le s F o r e ig n S a le s U .S . S a le s F o r e ig n S a le s
Sales
Territories
Segment Income Statement
• Segment income statement follows the
contribution approach.
• The fixed costs are, however, further divided into
traceable and common.
– Traceable (Direct) costs of a segment are costs
that are directly related to that segment or can
be reasonably allocated to it.
– Common (Indirect) costs are costs that are not
directly related to any segment and cannot be
reasonably allocated to segments.
Identifying Traceable Fixed Costs
Hoagland's
Lakeshore Bar Restaurant
Sales $ 800,000 $ 100,000 $ 700,000
Variable costs 310,000 60,000 250,000
CM 490,000 40,000 450,000
Traceable FC 246,000 26,000 220,000
Segment margin 244,000 $ 14,000 $ 230,000
Common costs 200,000
Profit $ 44,000
Quick Test