Chapter 5 Variable Costing A Tool for Management

Chapter 5 Variable Costing: A Tool for Management

Overview of Absorption and Variable Costing Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 2000

Penghitungan Biaya per Unit Harvey Co. memproduksi satu produk jadi, berikut ini informasi : Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 2000

Penghitungan Biaya per Unit product cost is determined as follows: Selling and administrative expenses are always treated as period expenses and deducted from revenue. Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 2000

Income Comparison of Absorption and Variable Costing Harvey Co. had no beginning inventory, produced 25, 000 units and sold 20, 000 units this year. Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 2000

Income Comparison of Absorption and Variable Costing Harvey Co. had no beginning inventory, produced 25, 000 units and sold 20, 000 units this year. Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 2000

Income Comparison of Absorption and Variable Costing Now let’s look at variable costing by Harvey Co. Variable costs only. All fixed manufacturing overhead is expensed. Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 2000

Income Comparison of Absorption and Variable Costing Let’s compare the methods. Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 2000

Income Comparison of Absorption and Variable Costing Let’s compare the methods. Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 2000

Reconciliation We can reconcile the difference between absorption and variable income as follows: Fixed mfg. overhead $150, 000 = = $6. 00 per unit Units produced 25, 000 Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 2000

Extending the Example Let’s look at the second year of operations for Harvey Company. Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 2000

Harvey Co. Year 2 In its second year of operations, Harvey Co. started with an inventory of 5, 000 units, produced 25, 000 units and sold 30, 000 units. Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 2000

Harvey Co. Year 2 Unit product cost is determined as follows: No change in Harvey’s cost structure. Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 2000

Harvey Co. Year 2 Now let’s look at Harvey’s income statement assuming absorption costing is used. Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 2000

Harvey Co. Year 2 These are the 25, 000 units produced in the current period. Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 2000

Harvey Co. Year 2 Next, we’ll look at Harvey’s income statement assuming is used. Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 2000

Harvey Co. Year 2 Variable costs only. All fixed manufacturing overhead is expensed. Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 2000

Summary Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 2000

Summary Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 2000

Advantages of the Contribution Approach Consistent with CVP analysis. Management finds it easy to understand. Advantages Impact of fixed costs on profits emphasized. Irwin/Mc. Graw-Hill Net income is closer to net cash flow. Consistent with standard costs and flexible budgeting. Easier to estimate profitability of products and segments. Profit is not affected by changes in inventories. © The Mc. Graw-Hill Companies, Inc. , 2000

End of Chapter 7 Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 2000

Variable versus Absorption Costing All manufacturing costs must be assigned to products to properly match revenues and costs. Absorption Costing Irwin/Mc. Graw-Hill Fixed costs are not really the costs of any particular product. Variable Costing © The Mc. Graw-Hill Companies, Inc. , 2000

Variable versus Absorption Costing Depreciation, taxes, insurance and salaries are just as essential to products as variable costs. Absorption Costing Irwin/Mc. Graw-Hill These are capacity costs and will be incurred if nothing is produced. Variable Costing © The Mc. Graw-Hill Companies, Inc. , 2000

Variable versus Absorption Costing I guess we won’t be solving this controversy today! Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 2000

Impact of JIT Inventory Methods In a JIT inventory system. . . Production tends to equal sales. . . So, the difference between variable and absorption income tends to disappear. Irwin/Mc. Graw-Hill © The Mc. Graw-Hill Companies, Inc. , 2000