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Chapter 21 Variable Costing

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Page 1: Nobles finmgr5 ppt_21

Chapter 21Variable Costing

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© 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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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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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.

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How Does Variable Costing Differ from Absorption Costing?

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Comparison of Unit Product Costs

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Comparison of Unit Product Costs

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Learning Objective 2

Compute operating income using variable costing and absorption costing

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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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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:

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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

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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

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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

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Learning Objective 3

Use variable costing to make management decisions for a manufacturing business

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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

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Learning Objective 4

Use variable costing to make management decisions for a service business

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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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