bg management accounting chapter 6 384

Overview of Absorption and Variable CostingVariable costing also called direct/marginal costing is a method that charges products with only the variable manufacturing costs.. The cost of

CHAPTER 6 VARIABLE COSTING AND SEGMENT REPORTING

6.1 Overview of Absorption and Variable Costing

Variable costing (also called direct/marginal costing) is a

method that charges products with only the variable manufacturing costs The cost of a unit of product consists of the three variable manufacturing costs — direct material, direct labor, and variable manufacturing overhead.

6.1 Overview of Absorption and Variable

Costing

Absorption costing (also called full costing) is a method that

charges products with all manufacturing costs, regardless of whether the costs are fixed or variable The cost of a unit of product consists of all four types of manufacturing costs — direct material, direct labor, variable manufacturing overhead, and fixed manufacturing overhead.

6.1 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

Product

Costs

Period

Costs

Product Costs

Period Costs

6.2 Income Comparison of Absorption and Variable Costing

Let’s assume the following additional information for Harvey Company

– 20,000 units were sold during the year at a price of $30 each

– There were no units in beginning inventory

Now, let’s compute net operating income using both absorption and variable costing

Unit Cost Computations

Harvey Company produces a single product with the following information available:

6.2 Income Comparison of Absorption and Variable Costing

Income Statement of Absorption Costing

6.2 Income Comparison of Absorption and Variable Costing

Income Statement of Variable Costing

6.2 Income Comparison of Absorption and Variable Costing

The diffirence from Income of 2 methods

6.2 Income Comparison of Absorption and Variable Costing

Opponents of absorption costing argue that shifting fixed manufacturing overhead costs between periods

can lead to misinterpretations and faulty decisions

Those who favor variable costing argue that the income statements are easier to understand because net operating income is only affected by changes in unit sales The resulting income amounts are more consistent with

managers’ expectations

6.3 Segment income statement

A segment is any part or activity of an organization about which a manager seeks cost, revenue, or profit data

A segment can be

6.3.1 Segment income statement

Traceable and Common Fixed Costs and the Segment Margin

A traceable fixed cost of a segment is a fixed cost that is incurred

because of the existence of the segment— if the segment had never existed, the fixed cost would not have been incurred; and if the segment were eliminated, the fixed cost would disappear.

6.3.1 Segment income statement

Traceable and Common Fixed Costs and the Segment Margin

A common fixed cost is a fixed cost that supports the operations

of more than one segment, but is not traceable in whole or in part to any one segment Even if a segment were entirely eliminated, there

would be no change in a true common fixed cost

6.3.1 Segment income statement

The segment margin is obtained by deducting the traceable fixed costs of a segment from the

segment’s contribution margin It represents the margin available after a segment has covered all of

its own costs

6.3.2 Segment break - even point and

decision making

There are two keys to building segmented

income statements:

A contribution format should be used

because it separates fixed from

variable costs and it enables the

calculation of a contribution margin.

Traceable fixed costs should be separated from common fixed costs to enable the calculation of a segment

margin.