Chapter 8 - Variable costing and the costs of quality and sustainability. After completing this chapter, you should be able to: Explain the accounting treatment of fixed manufacturing overhead under absorption and variable costing, prepare an income statement under absorption costing, prepare an income statement under variable costing,...
Trang 1Variable Costing and the Costs of Quality and Sustainability
Chapter 8
Trang 2Absorption and Variable Costing
Absorption
Costing
Variable Costing
Direct materials Direct labor Product costs Product costs Variable mfg overhead
Fixed mfg overhead
Period costs Period costs Selling & Admin exp.
Trang 3Absorption and Variable Costing
Absorption
Costing
Variable Costing
Direct materials Direct labor Product costs Product costs Variable mfg overhead
Fixed mfg overhead
Period costs Period costs Selling & Admin exp.
The difference between absorption and variable
Trang 4Absorption and Variable Costing
Mellon Co produces a single product with the following
information available:
Number of units produced annually 25,000
Variable costs per unit:
Direct materials, direct labor and variable mfg overhead $ 10 Selling & administrative
Trang 5Absorption and Variable Costing
Unit product cost is determined as follows:
Absorption Costing
Variable Costing Direct materials, direct labor, and
variable mfg overhead $ 10 $ 10
Fixed mfg overhead
($150,000 ÷ 25,000 units) 6
-Unit product cost $ 16 $ 10
Selling and administrative expenses are
always treated as period expenses and
Trang 6Absorption Costing
Income Statements
Mellon Co had no beginning inventory, produced 25,000 units, and
sold 20,000 units this year at $30 each
Absorption Costing
Sales (20,000 × $30 ) $ 600,000 Less cost of goods sold:
Beginning inventory Add COGM
Goods available for sale Ending inventory
Gross margin Less selling & admin exp.
Variable Fixed Net income
Trang 7Absorption Costing
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
Less selling & admin exp.
Variable Fixed Net income
Absorption Costing
Income Statements
Mellon Co had no beginning inventory, produced 25,000 units, and
sold 20,000 units this year at $30 each
Trang 8Absorption Costing
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
Less selling & admin exp.
Variable (20,000 × $3 ) $ 60,000 Fixed 100,000 160,000
Absorption Costing
Income Statements
Mellon Co had no beginning inventory, produced 25,000 units, and
sold 20,000 units this year at $30 each
Trang 9Goods available for sale Ending inventory
Variable cost of goods sold Variable selling & administrative expenses
Contribution margin
Less fixed expenses:
Manufacturing overhead Selling & administrative expenses
Trang 10expenses Contribution margin
Less fixed expenses:
Manufacturing overhead Selling & administrative expenses Net income
We exclude the fixed manufacturing
overhead.
Trang 11Variable 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 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
Less fixed expenses:
Manufacturing overhead $ 150,000 Selling & administrative expenses 100,000 250,000
Variable Costing
Income Statements
Now let’s look at variable costing by Mellon Co.
Trang 12Reconciling Income Under Absorption
and Variable Costing
We can reconcile the difference between absorption and
variable net income as follows:
Variable costing net income $ 90,000 Add: Fixed mfg overhead costs
deferred in inventory (5,000 units × $6 per unit) 30,000
Absorption costing net income $ 120,000
Fixed mfg overhead $150,000
Units produced 25,000 = = $6.00 per unit
Trang 13Cost-Volume-Profit Analysis
Variable costing and CVP are consistent as both treat fixed
costs as a lump sum
Absorption costing is inconsistent with CVP because absorption costing treats fixed costs on a per unit basis
Trang 14Mellon Co Year 2
In its second year of operations, Mellon Co started with an
inventory of 5,000 units, produced 25,000 units, and sold 30,000
units at $30 each
Number of units produced annually 25,000
Variable costs per unit:
Direct materials, direct labor and variable mfg overhead $ 10 Selling & administrative
Trang 15Mellon Co Year 2
Unit product cost is determined as follows:
Absorption Costing
Variable Costing Direct materials, direct labor,
and variable mfg overhead $ 10 $ 10
Fixed mfg overhead
($150,000 ÷ 25,000 units) 6
-Unit product cost $ 16 $ 10
There has been no
Trang 16Mellon Co Year 2
Units in ending inventory from the previous period.
Trang 18Variable cost of goods sold $ 300,000
Variable selling & administrative
Mellon Co Year 2
Excludes fixed manufacturing overhead.
Trang 19In the first period, production (25,000 units)
was greater than sales (20,000).
Trang 20For the two-year period, total absorption
income and total variable income are the same.
Income Comparison
Costing Method 1st Period 2nd Period Total
Absorption $ 120,000 $ 230,000 $ 350,000
Variable 90,000 260,000 350,000
Trang 21Management finds it easy to understand
Consistent withCVP analysis
Emphasizes contribution in short-run pricing decisions
Profit for period notaffected by changes
Impact of fixedcosts on profits
Evaluation of Variable Costing
Trang 22Advantages pricing decisions that mustConsistent with long-run
cover full cost
External reportingand income tax lawrequire absorption costing
Evaluation of Absorption Costing
Fixed manufacturing overhead istreated the same as the other productcosts, direct material and direct labor
Trang 23Costs of Assuring Quality
products with the
same functional use
Quality of design refers
to how well it is conceived
or designed for its intended use
Quality of conformance
refers to the extent to which a product meets the specification of its design.
Trang 24There are four types of quality
costs.
Prevention costs are the costs of preventing
defects.
Appraisal costs are the costs of determining
whether defects exist.
Internal failure costs are the costs of repairing
defects found prior to product delivery.
External failure costs are those costs incurred
after product delivery.
Trang 25What is the Optimal Level
Trang 26Costs of Environmental
Sustainability
Sustainable development includes business activity
that produces the goods and services needed in the
present without limiting the ability of future generations
to meet their meets.
Environmental costs are the costs of dealing with
environmental issues, such as BP’s costs in cleaning up the company’s spill in the Gulf of Mexico.
Environmental cost management is the strategic
implantation of systems for identifying, measuring,
controlling, and reducing the private environmental
costs borne by a company or other organization.
Trang 27Environmental costs may be
categorized in several ways:
Private environmental costs are those borne by a
company or individual Social environmental costs are those borne by the public at large.
Visible environmental costs are those that are known
and clearly identified as tied to environmental issues Hidden social environmental costs cannot be clearly tied
to environmental issues.
Trang 28Visible and hidden environmental costs may be
Monitoring costs include the costs of monitoring the regulatory environmental as well as monitoring the production process to determine if pollution is being generated
Abatement costs include costs to reduce or eliminate pollution
Remediation costs include on-site and off-site remediation costs On-site remediation includes costs of reducing or preventing the discharge into the environment of pollutants that have been
generated in the production process Off-site remediation
includes the costs of reducing or eliminating pollutants from the environment after they have been discharged