Managerial accounting 5th jiambalvo ch05

Slide 5-4Variable Costing  Inventory costs includes:  Fixed manufacturing overhead treated as a period cost  Helpful for internal decision making  Not allowed for GAAP reporting L

Prepared by

Debby Bloom-Hill

Slide 5-2

CHAPTER 5

Variable Costing

Slide 5-3

Full (Absorption) Costing

reporting purposes

 Direct materials used

 Direct labor incurred

 Manufacturing overhead

Learning objective 1: Explain the difference

Slide 5-4

Variable Costing

 Inventory costs includes:

 Fixed manufacturing overhead

treated as a period cost

 Helpful for internal decision

making

 Not allowed for GAAP reporting

Learning objective 1: Explain the difference

between full (absorption) and variable costing

Slide 5-5

Which of the following complies with

GAAP for external reporting purposes?

Test Your Knowledge 1

Learning objective 1: Explain the difference

Slide 5-6

Full (Absorption) Costing

Learning objective 1: Explain the difference

between full (absorption) and variable costing

Slide 5-7

Variable Costing

Learning objective 1: Explain the difference

variable costing is their treatment of

fixed manufacturing overhead

 Under full costing, fixed

manufacturing overhead is included in inventory

determination of expense only when the inventory is sold

 Under variable costing, fixed

manufacturing overhead becomes a

period expense Learning objective 1: Explain the difference

between full (absorption) and variable costing

cost behavior, either fixed or variable

 With variable and fixed expenses

separated, the contribution margin can

be presented

total variable expenses

 The contribution margin allows users

to make reasonable estimates of how

much profit will change with changes in sales

Learning objective 2: Prepare an

margin if sales change by $10,000

$10,000 * 0.65 = $6,500

  

Learning objective 2: Prepare an

income statement using variable costing.

Variable Costing Income

Statement

Variable Costing Income

Statement

Learning objective 2: Prepare an

income statement using variable costing.

Slide 5-13

 The full costing income

statement cannot be used to

estimate the increase in profit

due to an increase in sales

includes both fixed and variable

costs

when sales increase

much of cost of goods sold is fixed or

Variable Costing vs Full Costing Income Statement

Variable Costing vs Full Costing Income Statement

Learning objective 3: Discuss the effect of

production on full and variable costing income.

Slide 5-15

Clausen Tube Full Cost per Unit

Clausen Tube Full Cost per Unit

Full cost per unit for 5,000 units is

Fixed Overhead $1,200,000/5,000

unit

Slide 5-16

Clausen Tube Variable Cost per Unit

Clausen Tube Variable Cost per Unit

Variable cost per unit for 5,000 units is calculated as follows:

Learning objective 3: Discuss the effect of

production on full and variable costing income.

Total Material Costs $600 per unit

Variable Cost per Unit = $900 per unit

Learning objective 3: Discuss the effect of

Production equals sales (5,000 units)

Learning objective 3: Discuss the effect of

production on full and variable costing income.

Sales 5,000 x $2,000 = 10,000,000 Cost of goods sold 5,000 x $1,140 = 5,700,000

Selling & Admin Expenses* 800,000

Sales 5,000 x $2,000 = 10,000,000 Variable costs 5,000 * ($900 + $40) 4,700,000 Contribution margin 5,300,000

quantity sold, there is no difference

between net income calculated using

full cost versus variable costing

 Since all units produced are sold, no

fixed cost ends up in ending inventory

 The only difference is that variable

costing calculates the contribution

margin

Learning objective 3: Discuss the effect of

Production (6,000 units) is greater

than sales (4,800 units)

Learning objective 3: Discuss the effect of

production on full and variable costing income.

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Quantity Produced is Greater Than Quantity Sold

Quantity Produced is Greater Than Quantity Sold

than the quantity sold income will be

greater under full costing as opposed

to variable costing

 Under full costing, inventory cost

includes fixed manufacturing overhead

 Under variable costing, fixed

manufacturing overhead is a period cost

Learning objective 3: Discuss the effect of

Learning objective 3: Discuss the effect of

production on full and variable costing income.

Slide 5-23

Quantity Produced is Less

Than Quantity Sold

Quantity Produced is Less

Than Quantity Sold

the quantity sold, income will be

greater under variable costing as

opposed to full costing

 Beginning inventory under fixed costing includes fixed manufacturing overhead

 When the beginning inventory is

charged to cost of goods sold the

charge will be higher under full costing

Learning objective 3: Discuss the effect of

Learning objective 3: Discuss the effect of

production on full and variable costing income.

Slide 5-25

Summit Manufacturing, Inc produces

snow shovels The selling price is $25

Costs are:

Test Your Knowledge 2

Production is 42,000 snow shovels

Calculate full cost per unit.

Learning objective 3: Discuss the effect of

Materials 4 Labor 3 Variable overhead 2 Fixed overhead 168,000 Variable selling & admin 1 Fixed selling & sdmin 152,000 Full cost per unit

Slide 5-26

Summit Manufacturing, Inc produces

snow shovels The selling price is $25

Costs are:

Test Your Knowledge 2

Production is 42,000 snow shovels

Full cost is $13 per unit.

Learning objective 3: Discuss the effect of

production on full and variable costing income.

Variable overhead 2 2

Fixed overhead 168,000 168,000 / 42,000 4

Variable selling & admin 1

Fixed selling & sdmin 152,000

Full Cost

Slide 5-27

Summit Manufacturing, Inc produces

snow shovels The selling price is $25

Costs are:

Test Your Knowledge 3

Production is 42,000 snow shovels

Calculate variable cost per unit.

Learning objective 3: Discuss the effect of

Materials 4 Labor 3 Variable overhead 2 Fixed overhead 168,000 Variable selling & admin 1 Fixed selling & sdmin 152,000 Full cost per unit

Slide 5-28

Summit Manufacturing, Inc produces

snow shovels The selling price is $25

Costs are:

Test Your Knowledge 3

Production is 42,000 snow shovels

Variable cost is $9 per unit.

Learning objective 3: Discuss the effect of

production on full and variable costing income.

Variable selling & admin 1

Fixed selling & sdmin 152,000

 Units produced = units sold

 Units produced greater than

Slide 5-30

Reducing Production

Learning objective 3: Discuss the effect of

production on full and variable costing income.

Slide 5-31

Kincade Faucets produces a variety of faucets During the year, the company incurred

$400,000 of depreciation expense on its

manufacturing equipment How much

depreciation expense will be in Finished Goods Inventory under variable costing?

a Depreciation is a fixed cost which is

expensed as a period cost under variable costing

Test Your Knowledge 4

Learning objective 3: Discuss the effect of

Slide 5-32

Impact of JIT on Income

 Companies using JIT typically

have low levels of inventory

 Units produced are

approximately equal to units sold

 Difference between full costing

and variable costing is likely to

be very small.

Learning objective 4: Explain the impact of JIT on the

difference between full and variable costing income

Slide 5-33

Benefits of Variable Costing

for Internal Reporting

Benefits of Variable Costing

for Internal Reporting

 Variable costing facilitates

cost-volume-profit (CVP) analysis

estimate the impact of changes in volume on cost and profit

costing

Learning objective 5: Discuss the benefits of

Slide 5-34

Benefits of Variable Costing

for Internal Reporting

Benefits of Variable Costing

for Internal Reporting

earnings via production volume

based on income in their division

when production is greater than

sales

manage earnings under full costing

Learning objective 5: Discuss the benefits of

variable costing for internal reporting purposes

Slide 5-35

Impact of Changes in Sales

Learning objective 5: Discuss the benefits of

Slide 5-36

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