ch 07 variabel costing (1) dr elearning usk asrul.ppt

ch 07 variabel costing (1) dr elearning usk asrul.ppt

1. Variable Costing: A
Tool for Management
Chapter 7

2. © The McGraw-Hill Companies, Inc., 2003
McGraw-Hill/Irwin
Overview of Absorption and
Variable Costing
The only cost of driving my car
on a 200 mile trip today is
$12 for gasoline.
Variable
Costing

3. © The McGraw-Hill Companies, Inc., 2003
McGraw-Hill/Irwin
Overview of Absorption and
Variable Costing
No! You must consider these costs too!
Absorption
Costing
Cost Per month Per day
Car payment 300.00$ 10.00$
Insurance 60.00 2.00

4. © The McGraw-Hill Companies, Inc., 2003
McGraw-Hill/Irwin
Overview of Absorption and
Variable Costing
You are wrong. I have the car
payment and the
insurance payment even if
I do not make the trip.
Variable
Costing

5. © The McGraw-Hill Companies, Inc., 2003
McGraw-Hill/Irwin
Overview of Absorption and
Variable Costing
Who’s right?
How should we treat the car
payment and the insurance?

6. © The McGraw-Hill Companies, Inc., 2003
McGraw-Hill/Irwin
Overview of Absorption and
Variable Costing
Direct Materials
Direct Labor
Variable Manufacturing Overhead
Fixed Manufacturing Overhead
Variable Selling and Administrative Expenses
Fixed Selling and Administrative Expenses
Variable
Costing
Absorption
Costing
Product
Costs
Period
Costs
Product
Costs
Period
Costs

7. © The McGraw-Hill Companies, Inc., 2003
McGraw-Hill/Irwin
Variable costing
Balance Sheet
Costs Inventories
Note: Manufacturing Cost
Flows
Income
Statement
Expenses
Cost of
Goods
Sold
Selling and
Administrative
Period Costs
Work in
Process
Finished
Goods
Raw Materials
Variable
Manufacturing
Overhead
Material Purchases
Direct Labor
Selling and
Administrative
Fixed
Manufacturing
Overhead
A
bsorption costing

8. © The McGraw-Hill Companies, Inc., 2003
McGraw-Hill/Irwin

Note: Manufacturing Cost
Flows
Absorption Costing Balance Sheet
0
50
100
150
Inventory Retained
Earnings
Fixed
manufacturing
overhead in
inventories
Variable
costing

9. © The McGraw-Hill Companies, Inc., 2003
McGraw-Hill/Irwin
Let’s put some numbers to the
issue and see if it will
sharpen our understanding.
Overview of Absorption and
Variable Costing

10. © The McGraw-Hill Companies, Inc., 2003
McGraw-Hill/Irwin
Harvey Co. produces a single product with
the following information available:
Unit Cost Computations

11. © The McGraw-Hill Companies, Inc., 2003
McGraw-Hill/Irwin
Unit product cost is determined as follows:
Selling and administrative expenses are
always treated as period expenses and
deducted from revenue.
Unit Cost Computations

12. © The McGraw-Hill Companies, Inc., 2003
McGraw-Hill/Irwin
Absorption Costing
Sales (20,000 × $30) 600,000$
Less cost of goods sold:
Beginning inventory -$
Add COGM (25,000 × $16) 400,000
Goods available for sale 400,000
Ending inventory (5,000 × $16)80,000 320,000
Gross margin 280,000
Less selling & admin. exp.
Variable
Fixed
Net operating income
Harvey Co. had no beginning inventory, produced
25,000 units and sold 20,000 units this year.
Income Comparison of
Absorption and Variable Costing

13. © The McGraw-Hill Companies, Inc., 2003
McGraw-Hill/Irwin
Harvey Co. had no beginning inventory, produced
25,000 units and sold 20,000 units this year.
Absorption Costing
Sales (20,000 × $30) 600,000$
Less cost of goods sold:
Beginning inventory -$
Add COGM (25,000 × $16) 400,000
Goods available for sale 400,000
Ending inventory (5,000 × $16)80,000 320,000
Gross margin 280,000
Less selling & admin. exp.
Variable (20,000 × $3) 60,000$
Fixed 100,000 160,000
Net operating income 120,000$
Income Comparison of
Absorption and Variable Costing

14. © The McGraw-Hill Companies, Inc., 2003
McGraw-Hill/Irwin
Variable Costing
Sales (20,000 × $30) 600,000$
Less variable expenses:
Beginning inventory -$
Add COGM (25,000 × $10) 250,000
Goods available for sale 250,000
Less ending inventory (5,000 × $10)50,000
Variable cost of goods sold 200,000
Variable selling & administrative
expenses (20,000 × $3) 60,000 260,000
Contribution margin 340,000
Less fixed expenses:
Manufacturing overhead 150,000$
Selling & administrative expenses100,000 250,000
Net operating income 90,000$
Now let’s look at variable costing by Harvey Co.
Variable
costs
only.
All fixed
manufacturing
overhead is
expensed.
Income Comparison of
Absorption and Variable Costing

15. © The McGraw-Hill Companies, Inc., 2003
McGraw-Hill/Irwin
Let’s compare the methods.
Income Comparison of
Absorption and Variable Costing

16. © The McGraw-Hill Companies, Inc., 2003
McGraw-Hill/Irwin
Reconciliation
Variable costing net operating income 90,000$
Add: Fixed mfg. overhead costs
deferred in inventory
(5,000 units × $6 per unit) 30,000
Absorption costing net opearting income 120,000$
Fixed mfg. overhead $150,000
Units produced 25,000 units
= = $6.00 per unit
We can reconcile the difference between
absorption and variable income as follows:

17. © The McGraw-Hill Companies, Inc., 2003
McGraw-Hill/Irwin
Extending the Example
Let’s look at the
second year
of operations
for Harvey
Company.

18. © The McGraw-Hill Companies, Inc., 2003
McGraw-Hill/Irwin
Harvey Co. Year 2
In its second year of operations, Harvey Co. started with
an inventory of 5,000 units, produced 25,000 units and
sold 30,000 units.

19. © The McGraw-Hill Companies, Inc., 2003
McGraw-Hill/Irwin
Harvey Co. Year 2
Unit product cost is determined as follows:
No change in Harvey’s
cost structure.

20. © The McGraw-Hill Companies, Inc., 2003
McGraw-Hill/Irwin
Harvey Co. Year 2
Now let’s look at Harvey’s income statement
assuming absorption costing is used.

21. © The McGraw-Hill Companies, Inc., 2003
McGraw-Hill/Irwin
Absorption Costing
Sales (30,000 × $30) 900,000$
Less cost of goods sold:
Beg. inventory (5,000 × $16) 80,000$
Add COGM (25,000 × $16) 400,000
Goods available for sale 480,000
Less ending inventory - 480,000
Gross margin 420,000
Less selling & admin. exp.
Variable (30,000 × $3) 90,000$
Fixed 100,000 190,000
Net operating income 230,000$
Harvey Co. Year 2
These are the 25,000 units
produced in the current period.

22. © The McGraw-Hill Companies, Inc., 2003
McGraw-Hill/Irwin
Harvey Co. Year 2
Next, we’ll look at Harvey’s income statement
assuming is used.

23. © The McGraw-Hill Companies, Inc., 2003
McGraw-Hill/Irwin
Harvey Co. Year 2
Variable
costs
only.
All fixed
manufacturing
overhead is
expensed.

24. © The McGraw-Hill Companies, Inc., 2003
McGraw-Hill/Irwin
Reconciliation
Variable costing net operating income 260,000$
Deduct: Fixed manufacturing overhead
costs released from inventory
(5,000 units × $6 per unit) 30,000
Absorption costing net operating income 230,000$
We can reconcile the difference between
absorption and variable income as follows:
Fixed mfg. overhead $150,000
Units produced 25,000 units
= = $6.00 per unit

25. © The McGraw-Hill Companies, Inc., 2003
McGraw-Hill/Irwin
Summary

26. © The McGraw-Hill Companies, Inc., 2003
McGraw-Hill/Irwin
Summary

27. © The McGraw-Hill Companies, Inc., 2003
McGraw-Hill/Irwin
Advantages of the
Contribution Approach
Advantages
Management finds it
easy to understand.
Consistent with
CVP analysis.
Net operating income
is closer to
net cash flow.
Profit is not affected by
changes in inventories.
Consistent with standard
costs and flexible budgeting.
Impact of fixed
costs on profits
emphasized.
Easier to estimate profitability
of products and segments.

28. © The McGraw-Hill Companies, Inc., 2003
McGraw-Hill/Irwin
Fixed costs are
not really the costs
of any particular
product.
Variable
Costing
Variable versus
Absorption Costing
Absorption
Costing
All manufacturingAll manufacturing
costs must be assignedcosts must be assigned
to products to properlyto products to properly
match revenues andmatch revenues and
costs.costs.

29. © The McGraw-Hill Companies, Inc., 2003
McGraw-Hill/Irwin
Absorption
Costing
These are capacity
costs and will be
incurred even if nothing
is produced.
Variable versus
Absorption Costing
Variable
Costing
Depreciation,
taxes, insurance and
salaries are just as
essential to products
as variable costs.

30. © The McGraw-Hill Companies, Inc., 2003
McGraw-Hill/Irwin
Variable
Costing
Absorption
costing product costs
are misleading for
decision making.
They are the
numbers that
appear on our
external
reports.
Absorption
Costing
Variable versus
Absorption Costing

31. © The McGraw-Hill Companies, Inc., 2003
McGraw-Hill/Irwin
Note on the
Effects of Volume
Variable cost $10
Fixed manufacturing overhead $100,000
Units sold 10,000
Units
Produced
Total Variable
Cost
Fixed
Manufacturing
Overhead
Total
Manufacturing
Cost
Average
Manufacturing
Cost
Cost of
Goods Sold
10,000 $100,000 $100,000 $200,000 20.00$ 200,000$
12,000 $120,000 $100,000 $220,000 18.33$ 183,333$
14,000 $140,000 $100,000 $240,000 17.14$ 171,429$
16,000 $160,000 $100,000 $260,000 16.25$ 162,500$
18,000 $180,000 $100,000 $280,000 15.56$ 155,556$
20,000 $200,000 $100,000 $300,000 15.00$ 150,000$
Absorption Costing
Cost of goods sold decreases because production
exceeds sales, leaving a portion of fixed
manufacturing costs in inventory.

32. © The McGraw-Hill Companies, Inc., 2003
McGraw-Hill/Irwin
Note on the
Effects of Volume
COGS for 10,000 units
$100,000
$150,000
$200,000
Number of units produced
C
O
G
S
Absorption Costing
Cost of goods sold decreases because production
exceeds sales, leaving a portion of fixed
manufacturing costs in inventory.

33. © The McGraw-Hill Companies, Inc., 2003
McGraw-Hill/Irwin
Impact of JIT Inventory
Methods
In a JIT inventory system . . .
Production
tends to equal
sales . . .
So, the difference between variable and
absorption income tends to disappear.

34. © The McGraw-Hill Companies, Inc., 2003
McGraw-Hill/Irwin
End of Chapter 7