chapter 21 variable costing. © 2016 pearson education, inc. learning objectives 1.distinguish...
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Chapter 21Variable Costing
© 2016 Pearson Education, Inc.
Learning Objectives
1. Distinguish between variable costing and absorption costing
2. Compute operating income using variable costing and absorption costing
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© 2016 Pearson Education, Inc.
Learning Objectives
3. Use variable costing to make management decisions for a manufacturing business
4. Use variable costing to make management decisions for a service business
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© 2016 Pearson Education, Inc.
Learning Objective 1
Distinguish between variable costing and absorption costing
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© 2016 Pearson Education, Inc.
How Does Variable Costing Differ from Absorption Costing?
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• Managerial accounting provides managers with information that is useful for internal decision making.
• The cost of producing products is estimated using one of two methods:– Absorption costing: Incudes all product costs.– Variable costing: Considers only variable
manufacturing costs.
© 2016 Pearson Education, Inc.
How Does Variable Costing Differ from Absorption Costing?
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© 2016 Pearson Education, Inc.
Comparison of Unit Product Costs
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© 2016 Pearson Education, Inc.
Comparison of Unit Product Costs
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© 2016 Pearson Education, Inc.
Learning Objective 2
Compute operating income using variable costing and absorption costing
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© 2016 Pearson Education, Inc.
How Does Operating Income Differ Between Variable Costing and
Absorption Costing?• Variable costing and absorption costing
will result in different operating income when:– Units produced are more than units sold and– Units produced are less than units sold
• The operating income result is the same under both methods when units produced equal units sold.
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© 2016 Pearson Education, Inc.
Absorption Costing Variable Costing
Sales Sales
Less: Cost of Goods SoldDirect MaterialsDirect LaborVariable Manufacturing OverheadFixed Manufacturing Overhead
Less: Variable CostsDirect MaterialsDirect Labor Variable Manufacturing OverheadVariable Selling & Admin. Expenses
Gross Profit Contribution Margin
Less: Selling and Admin. ExpensesVariable Selling & Admin. ExpensesFixed Selling & Admin. Expenses
Less: Fixed CostsFixed Manufacturing OverheadFixed Selling & Admin. Expenses
Operating Income Operating Income
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How Does Operating Income Differ Between Variable Costing and
Absorption Costing?Income statements for absorption costing and variable costing:
© 2016 Pearson Education, Inc.
Production Equals Sales
• Assume the following: – There is no beginning Finished Goods
Inventory.– Number of units produced is 2,000, and units
sold is also 2,000. – There is no ending Finished Goods Inventory
because all units were sold.
• Operating income is the same under both methods.
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Production Equals Sales
© 2016 Pearson Education, Inc.
Production Exceeds Sales
• Assume the following:– There is no beginning Finished Goods
Inventory.– Produced 2,500 tablet computers.– Sold 2,000 tablet computers.– 500 units are included in ending Finished
Goods Inventory.
• Operating income under absorption costing is greater than under variable costing.
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Production Exceeds Sales
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Production Exceeds Sales
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Production Exceeds Sales
© 2016 Pearson Education, Inc.
Production Is Less Than Sales
• Assume the following:– There are 500 units in beginning Finished
Goods Inventory.– Produced 1,500 tablet computers.– Sold 2,000 tablet computers.– Zero units in ending Finished Goods Inventory.
• Operating income under absorption costing is less than under variable costing.
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Production Is Less Than Sales
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Production Is Less Than Sales
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Production Is Less Than Sales
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Production Is Less Than Sales
© 2016 Pearson Education, Inc.
Learning Objective 3
Use variable costing to make management decisions for a manufacturing business
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© 2016 Pearson Education, Inc.
How Can Variable Costing Be Used for Decision Making in a Manufacturing Company?
• For decision making, some cases should use variable costing, while other cases should use absorption costing.
• Manager decisions include: – Setting sales prices– Controlling costs– Planning production
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Analyzing Profitability
• Managers analyze profitability for products and segments. – Managers must determine which products to
sell. – Managers assess the success or failure of the
businesses segments. – Managers analyze the contribution margin per
unit and make decisions about the sales mix of its products.
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Products
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Business Segments
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Profitability Analysis
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Analyzing Contribution Margin
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Analyzing Contribution Margin
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Summary
© 2016 Pearson Education, Inc.
Learning Objective 4
Use variable costing to make management decisions for a service business
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© 2016 Pearson Education, Inc.
How Can Variable Costing Be Used for Decision Making in a
Service Company?• Service companies provide services, rather
than products, to their customers. – No inventory or Cost of goods sold
• Variable costing can be used by services since they have both fixed and variable costs.
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Operating Income
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Profitability Analysis
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Contribution Margin Analysis
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