Lecture (3)

Cost Accounting

Fall Semester 2022 / 2023

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 »Inventory Costing«

Chapter 2

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:Learning objectives
1) Difference between Inventory Costing
Methods
2) Income Statement using absorption
costing
3) Income statement using variable costing
4) Income statement using through put
costing

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1. Difference between Inventory
Costing Methods
 Absorption Costing:
- product costs are capitalized; period costs are
expensed.
- Absorption costing is a method of inventory
costing in which all variable manufacturing
costs and all fixed manufacturing costs are
included as inventorial costs.

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 Variable Costing:
- Variable product and period costs are
capitalized, fixed product and period costs are
expensed.
- Variable costing is a method of inventory
costing in which only variable manufacturing
costs are included as inventorial costs.
 Through put Costing :
only Direct Materials are capitalized; all other
costs are expensed

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Absorption Costing Income Statement .2
Revenues ( sales units x price per unit) .1 xxx

Beginning Inventory (V.+F.) xxx

+ Manufacturing cost (V. +F.) xxx )-(
(-) Ending Inventory (V.+F.) (xxx)
2. Cost of goods sold )xxx(
Gross Margin .3 xxxxx
(-) Operating cost ( V. +F.) )xxx(
4. Operating Net Income xxxxxx

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 Variable costing Income Statement -3
1. Revenues (sales units x price per unit) xxx
Beginning Inventory xxx
+ variable manufacturing cost xxx
(-) Ending Inventory (variable only) (Xxx) )-(
= Variable cost of goods sold xxxx

+ variable operating cost xxx

2.Total variable cost )xxx(
3. Contribution Margin xxxx
(-) fixed Costs ( F.Manufac. +F. Operating) )xxxx(
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4. Operating Net Income xxxx
:Example
Beginning Inventory units 0
Production units units 8,000
Sales units units 6,000
Ending Inventory units 2,000
Selling price per unit 1,000$
Variable direct material cost per 110$
unit
Variable direct manufacturing 40$
labor cost per unit

Variable direct manufacturing 50$

over head cost per unit
Fixed Manufacturing Cost 1,080,000
Fixed Marketing Cost 1,380,000
Variable Marketing cost per unit 185$

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:Required

A. Prepare income statement using variable

costing.
B. Prepare income statement using absorption
costing.

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 :Working paper
Items Absorption Variable
Revenues= Sales units x 6,000,000$ 6,000,000$
Selling price per unit
6,000x 1000=
6,000,000$
Manufacturing cost: Variable + fixed Variable only
- Variable 1,080,000 + 1,600,000 1,600,000
manufacturing cost
(200x 8000)
=1,600,000
- Fixed Manufacturing
Cost ( 135 x 80000)=
1,080,000
- Ending Inventory Variable + fixed variable only
2000 units (135+200)x 2000= 200x2000=400,000
670,000
- Variable marketing Added to fixed Added to variable cost of
cost (6,000 x 185) marketing cost goods sold
=1,110,000$

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12
:Notes
1. Total variable Manufacturing cost per unit=
D. M + L +O.H (110+40+50)= 200$
2. Variable Manufacturing cost= produced
units x Total variable Manufacturing cost per
unit
8,000x 200= 1,600,000 $

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 Fixed Manufacturing Cost per unit= total fixed .3
manufacturing cost ÷ produced units
135$ = 8,000 ÷1,080,000
4. Variable marketing cost= sales units x Variable
Marketing cost per unit
x 185 =1,110,000$ 6,000

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:Example
•Bobby Smith and Sons Company was concerned that increased sales did not
result in increased profits for 2016. Both variable unit and total fixed
manufacturing costs for 2015 and 2016 remained constant at $20 and $2,000,000,
respectively.
 
•In 2015, the company produced 100,000 units and sold 80,000 units at a price of
$50 per unit. There was no beginning inventory.

•In 2016, the company made 70,000 units and sold 90,000 units at a price of $50.
Selling and administrative expenses were all fixed at $100,000 each year.

Required:
1.Prepare income statement for each year using absorption costing.
2.Prepare income statement for each year using variable costing.

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:Working paper

items absorption variable

2015 2015
Revenues (sales units X )X50 80,000( )80,000X50(
sales price per unit) 400,000 400,000

Manufacturing cost: Variable only 2,000,000

• Variable= Variable + fixed
1,000,000X20 2,000,000+ 2,000,000
=2,000,000 = 4,000,000
• Fixed = 1,000,000X20
= 2,000,000

Ending Inventory: variable + Fixed Variable only

• Variable= 2000x20= 400,000 + 400,000= 400,000
400,000 800,000
• Fixed = 2000x20 =
400,000

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 1. Absorption Costing Income Statement
2015 2016
Revenues $4,000,000 $4,500,000
Cost of goods sold:
Beginning inventory 0 800,000
+Variable 2,000,000 1,400,000
+Fixed 2,000,000 2 ,000,000
Subtotal 4,000,000 4,200,000
- Ending inventory(V+F) (800,000) 0
Total COGS (3,200,000) ( 4,200,000)
 
Gross margin 800,000 300,000
-Selling and administrative (100,000) (100,000)
 
Operating income $ 700,000 $ 200,000
 

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 2.Variable costing Income Statement

2015 2016
Revenues $4,000,000 $4,500,000
Beginning Inventory 0 400,000
+ V.manuf. cost 2,000,000 1,400,000
Ending Inventory (400,000) 0
Total variable cost (1,600,000) ( 1,800,000)
Contribution margin 2,400,000 2,700,000
 
- Fixed expenses:
Manufacturing (2,000,000) ( 2,000,000)
Selling and administrative (100,000) (100,000)
 
Operating income $ 300,000 $ 600,000

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