13-1

Standard Costing,

13
Variable Costing,
and Throughput
Costing
Prepared by
Douglas Cloud
Pepperdine University
 13-2

Objectives
 Describe standard costing and explain why it
After costing
is the predominant readingmethod.
this
chapter, you should
 Develop standard fixed overhead rates and
be able to:
apply fixed overhead to products.
 Prepare standard absorption costing income
statement.
 Compare, contrast, and distinguish actual,
normal, and standard costing.
Continued
 13-3

Objectives
 Explain why variable costing offers
advantages over absorption costing for internal
reporting purposes.
 Prepare variable costing income statements.
 Describe throughput costing and prepare
income statements.
 13-4

Standard Absorption Costing

Under standard costing

inventories appear at standard
cost, not actual or normal cost.
 13-5

Standard Absorption Costing

An important reason for using

standard costing is that it integrates
standard costs and variances into
the company’s record.
 13-6

SMP Company, Operating Data 20X1

Production in units

110,000
Sales in units, at $80 each

90,000
Ending inventory in units

20,000
Actual production costs:
Variable

$2,255,000
 13-7

Calculating A Standard Fixed Cost

The standard fixed cost per unit depends on two
things:
(1) The choice of a measure of activity (e.g.,
direct labor hours, machine hours, setup time
etc.).
(2) A level of activity.
 13-8

Calculating A Standard Fixed Cost

Normal activity is the

Theoretical activity
average activity
is the absolute
expected or budgeted
Practical activity is
maximum that a
over the coming twothe maximumplant can produce,
to five years.
activity the company
with no interruptions
can achieve given
or problems at all.
the usual kinds of
interruptions.
 13-9

Calculating A Standard Fixed Cost

SMP’s management decides to set the standard per-
unit fixed cost using normal capacity of 100,000 units.

Standard fixed Budgeted fixed production costs

=
cost per unit Level of activity
$3,000,000
=
100,000
= $30 per unit
 13-10

Variances
Total actual variable production
cost (for source of data, turn
click on button below) $2,255,000
Standard variable costs
(110,000 x $20) 2,200,000
Unfavorable variable cost variances $ 55,000
 13-11

Variances
Total actual fixed overhead $3,200,000
Fixed overhead applied
(110,000 x $30) 3,300,000
Overapplied overhead $ 100,000
 13-12

Variances
Budgeted Applied
Actual fixed
fixed fixed
overhead
overhead overhead
$3,200,000 $3,000,000 $3,300,000
(110,000 x $30)

$200,000 U $300,000 F

Budget variance Volume variance

$100,000 F
Overapplied overhead
 13-13

SMP Company, Fixed Overhead, 20X1

Applied at 110,000 units
$3,300,000
$3,200,000 Volume Variance
Budget variance, $200,000 U $300,000 F
$3,000,000

Budget Budget Variance

Actual $200,000 U
$3,200,000
Dollars

Applied, $30 x units produced

100,000 110,000

Production in Units
 13-14

SMP Company, Income

Statement for 20X1
Sales
$7,200,000
Standard cost of sales:
Beginning inventory $ 0
Standard variable production costs 2,200,000
Applied fixed production costs 3,300,000
Cost of goods available for sale $5,500,000
Ending inventory 1,000,000
Standard cost of sales
4,500,000
Standard gross margin Continued
$2,700,000
 13-15

Standard gross margin $2,700,000

Variances:
Fixed manufacturing cost budget
variance $200,000 U
Fixed manufacturing cost volume
variance 300,000 F
Variable manufacturing cost variance 55,000 U 45,000
F
Actual gross margin $2,745,000
Selling and administrative expenses 1,850,000
Profit $ 895,000
 13-16

SMP Company, Income

Statement for 20X1
Sales $7,200,000
Cost of sales:
Standard cost of sales $4,500,000
Variances:
Fixed manufacturing cost budget variance 200,000U
Fixed manufacturing cost volume variance 300,000F
Variable manufacturing cost variances 55,000U
Cost of sales 4,455,000
Gross margin $2,745,000
Selling and administrative expenses 1,850,000
Profit $ 895,000

Alternative Format
 13-17

Review Problem
SMP, 20X1
Production, in units 95,000
Sales, in units, at $80 each 100,000
Ending inventory, in units 15,000
Actual production costs:
Variable $1,881,000
Fixed $2,950,000
Selling and administrative expenses:
Variable at $5 per unit $ 500,000
Fixed $1,400,000
Standard variable production cost (per unit) $20
Budgeted fixed production costs $3,000,000
 13-18
SMP Company, Income
Statement for 20X1
Sales $8,000,000
Standard cost of sales:
Beginning inventory $1,000,000
Standard variable production costs 1,900,000
Applied fixed production costs 2,850,000
Cost of goods available for sale $5,750,000
Ending inventory 750,000
Standard cost of sales $5,000,000
Variances:
Fixed mfg. cost budget variance 50,000 F
Fixed mfg. cost volume variance
Continued 150,000 U
Variable mfg. cost variances 19,000 F
 13-19

Sales (100,000 x $80)

$8,000,000
Cost of sales
5,081,000
Gross margin
$2,919,000
Selling and administrative expenses
Variances:
1,900,000
Variable cost: $1,881,000 – ($20 x 95,000) =$1,019,000
Profit
$19,000 F
 13-20

SMP Company Example

Budgeted Applied
Actual fixed
fixed fixed
overhead
overhead overhead
$2,950,000 $3,000,000 ( 95,000 x $30)
$2,850,000
$50,000 F $150,000 U

Budget variance Volume variance

$100,000
Total fixed overhead variances
 13-21

Multiple Products and

Activity-Based Costing
ARG Company
Portable Model Table Model
Standard direct labor hours 8 12
Number of component parts 100 200
Budgeted production 6,000 2,000
Total budgeted use of
components 600,000 400,000
Standard fixed overhead rate per component
($500,000/(600,000 + 400,000) = $0.50
 13-22

Multiple Products and

Activity-Based Costing
ARG Company
Portable Model Table Model
Material related:
Portable model ($100 x $0.50) $50
Table model (200 x $0.50) $100
Direct labor-related:
Portable model (8 hours x $4) 32
Table model (12 hours x $4) 48
Standard fixed overhead cost
per unit $82 $148
 13-23

ARG Company Example

Budgeted Applied
Actual Cost
Cost Cost

$510,000 $500,000 $550,000

$10,000 U $50,000 F

Budget variance Volume variance

$40,000
Total overapplied overhead
 13-24

Comparison of Standard and

Normal Costing
Manufacturing Costs
Direct Direct
Materials Labor Overhead

Actual cost system Actual Actual Actual

Normal cost system Actual Actual Applied

Standard cost system Standard Standard Standard

 13-25

Variable Costing

Variable costing
excludes fixed
production costs from
the unit costs of
inventories, and treats all
fixed costs as expenses
in the period incurred.
 13-26

Flow of Costs in a Manufacturing Firm

Materials
Inventory
Cost of
Direct Work in Finished Goods
Labor Process Goods Sold on
Inventory Inventory income
Variable statement
Manufacturing
Overhead Absorption
costing
Fixed Expense
Manufacturing on income
Overhead statement
 13-27
SMP Company, Income Statement for
20X1—Actual Variable Costing
Sales $7,200,000
Variable cost of sales:
Beginning inventory $ 0
Actual variable production costs 2,255,000
Cost of goods available for sale $2,255,000
Ending inventory 410,000
Variable cost of sales
1,845,000
Variable manufacturing margin
$5,355,000
Variable selling and administrative exp.
450,000
Contribution margin
 13-28
SMP Company, Income Statement for
20X2—Actual Variable Costing
Sales $8,000,000
Variable cost of sales:
Beginning inventory $ 410,000
Actual variable production costs 1,881,000
Cost of goods available for sale $2,291,000
Ending inventory 297,000
Variable cost of sales
1,994,000
Variable manufacturing margin
$6,006,000
Variable selling and administrative exp.
500,000
Contribution margin
 13-29

SMP Company, Standard Variable

Costing Income Statement for 20x2
Sales $8,000,000
Variable standard cost of goods sold 2,000,000
Standard variable manufacturing margin $6,000,000
Variable manufacturing cost variances 19,000
F
Variable manufacturing margin $6,019,000
Variable selling and administrative 500,000
Contribution margin $5,519,000
Actual fixed costs:
Budgeted fixed mfg. costs $3,000,000
Fixed mfg. cost budget variance $50,000
Selling and administrative 1,400,000 4,350,000
F
Profit $1,169,000
 13-30

Reconciliation of Incomes—Variable
and Absorption Costing
20x1 20x2
Variable costing net income $ 295,000$1,169,000
Absorption costing net income 895,000 1,019,000
Difference to be explained $ (600,000) $ 150,000

Explanation of income differences:

Fixed production costs-beg. inventory $ 0$ 600,000
Fixed production costs during year 3,200,000 2,950,000
$3,200,000 $3,550,000
Less fixed production costs-end. inventory 600,000 450,000
Total fixed costs expensed—absorption costing $2,600,000$3,100,000
Total fixed costs expensed—variable costing 3,200,000 2,950,000
Difference in incomes $ (600,000) $ 150,000
 13-31

Throughput Costing
 An extreme form of variable costing which follows
the principles of the Theory of Constraints.
 It is a radical departure from other methods in that it
treats all costs except unused materials as expenses.
 It does not record work in process or finished goods
inventories.
 It treats all direct labor and manufacturing overhead
costs as period costs expensing them as they are
incurred.
 13-32

Income Statement Comparison

Absorption Variable Throughput
Costing Costing Costing
Sales $180,000 $180,000 $180,000
Cost of sales 90,000 63,000 50,000
Gross margin 90,000 117,000 130,000
Other expenses:
Other mfg. costs 30,000 50,000
Selling and admin. 15,000 15,000 15,000
Total other expenses 15,000 45,000 65,000
Income $ 75,000 $ 72,000 $ 65,000
 13-33

Chapter 13

The End
13-34
 13-35

SMP Company, Operating Data 20X1

Production in ;units

110,000
Sales in units, at $80 each

90,000
Ending inventory in units

20,000
Actual production costs:
Variable

$2,255,000
Return to Slide 13-10