Absorption and Variable Costing

CHAPTER 8 ABSORPTION AND VARIABLE constituteLearning Objectives 1. Explain the accounting treatment of improve manufacturing strike chthonian engrossment and variable be. 2. typeset an income statement under preoccupation following. 3. Prepare an income statement under variable costing. 4. Reconcile reported income under submersion and variable costing. 5. Explain the implications of absorption and variable costing for cost-volume-profit analysis. 6. Evaluate absorption and variable costing. 7. Explain the rationale behind byput costing. . Prepare an income statement under throughput costing. Chapter Overview I. Product Cost and Fixed Manufacturing Overhead A. Absorption-costing income statements B. Variable-costing income statements II. Reconciliation of Absorption- and Variable- be Income A. No variety show in inventory levels B. Increase in inventory levels C. Decrease in inventory levels III. Overall Evaluation of Absorption and Variable Costing IV. Throughput Costi ng Key Lecture Concepts 1.PRODUCT COST AND FIXED MANUFACTURING OVERHEADProduct, or manufacturing, cost are comprised of direct materials, direct labor, variable manufacturing overhead, and touch on manufacturing overhead. The staple fibre difference among absorption and variable costing is the treatment of furbish up manufacturing overhead. * With absorption (full) costing, all be related to the manufacture of a undecomposed are product costs. Therefore, wintry manufacturing overhead attaches to the units being made and is carried in inventory until the product is sold. * Absorption costing results in the preparation of a traditional income statement. Absorption costing is considered GAAP and is acceptable for tax reporting. * beneath variable costing, product cost is comprised solely of variable manufacturing costs. Fixed manufacturing overhead is viewed as a cost of being ready to mother, not an true(a) production cost (i. e. , the cost will remain constant no matter how many units are manufactured). * Fixed manufacturing overhead is treated as a period cost and expensed immediately. * The income statement highlights cost behavior and is presented in a contribution margin format. Variable costing is useful to managers, as it dovetails nicely with cost-volume-profit analysis.2. RECONCILIATION OF ABSORPTION- AND VARIABLE-COSTING INCOME* The difference between the two approaches is the timing of when resolved manufacturing overhead is shown on the income statement when the product is sold under absorption costing and when incurred under variable costing. * The two methods will usually produce different income figures. * No swap in inventory production = sales * Under variable costing, all fixed manufacturing overhead is expensed.With absorption costing, the periods fixed overhead flows through to cost of goods sold. * Absorption-costing net income equals variable-costing net income. * Increase in inventory production sales * Under variable costing , all fixed manufacturing overhead is expensed. With absorption costing, a portion of the periods fixed overhead flows through to cost of goods sold and a portion remains on the isotropy sheet in inventory. * Absorption-costing net income is greater than variable-costing net income. * Decrease in inventory sales production Under variable costing, all fixed manufacturing overhead is expensed. With absorption costing, as units manufactured in a front period are sold, an amount greater than the current periods fixed overhead flows through to cost of goods sold. * Absorption-costing net income is less than variable-costing net income. * The difference between absorption- and variable-costing income figures can be reconciled as follows Income difference = Inventory throw in units x Fixed overhead per unit The difference is possible to be very small over a lengthy time period.3. OVERALL EVALUATION OF ABSORPTION AND VARIABLE COSTING* Pricing decisions * Absorption-cost proponents re pugn that fixed manufacturing overhead is a necessary production cost. Excluding this element from the inventoried cost of a product will understate the goods cost, which is troublesome for companies that use cost-based equipment casualty techniques. * Variable-cost proponents fight that variable cost is better for pricing decisions. Any price above a goods variable cost results in a positivistic contribution margin for the company. Many firms use variable costing for internal-reporting purposes. minded(p) that absorption costing must be employed for external fiscal reporting, companies can use both methods by making several honest end-of-period adjustments. 1 If a company operates in a just-in-time environment, inventories are unbroken very low and there will be little change in inventory from period to period. Thus, the income differences between absorption and variable costing will normally be insignificant.4. THROUGHPUT COSTING Throughput costing assigns only the unit-leve l expenditure for direct costs as the cost of products or services. * A unit-level cost is incurred every time that a unit of product is manufactured. * All costs other than the throughput cost are considered to be operating expenses of the period. * Proponents of throughput costing argue that this procedure eliminates the incentive to produce excess inventory because all non-throughput costs are expensed regardless of manufacturing volume.