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Chapter 7. Variable Costing: A Tool for Management. Overview of Absorption and Variable Costing. Unit Cost Computations. Harvey Co. produces a single product with the following information available:. Unit Cost Computations. Unit product cost is determined as follows:.
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Chapter7 Variable Costing:A Tool for Management
Unit Cost Computations Harvey Co. produces a single product with the following information available:
Unit Cost Computations Unit product cost is determined as follows: Selling and administrative expenses arealways treated as period expenses and deducted from revenue.
Income Comparison of Absorption and Variable Costing Harvey Co. had no beginning inventory, produced25,000 units and sold 20,000 units this year.
Income Comparison of Absorption and Variable Costing Harvey Co. had no beginning inventory, produced 25,000 units and sold 20,000 units this year.
Income Comparison of Absorption and Variable Costing Now let’s look at variable costing by Harvey Co. Variablecostsonly. All fixedmanufacturingoverhead isexpensed.
Income Comparison of Absorption and Variable Costing Let’s compare the methods.
Income Comparison of Absorption and Variable Costing Let’s compare the methods.
Reconciliation We can reconcile the difference betweenabsorption and variable income as follows: Fixed mfg. overhead $150,000 Units produced 25,000 = = $6.00 per unit
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.
Harvey Co. Year 2 Unit product cost is determined as follows: No change in Harvey’s cost structure.
Harvey Co. Year 2 These are the 25,000 units produced in the current period.
Harvey Co. Year 2 Variablecostsonly. All fixedmanufacturingoverhead isexpensed.
Income Comparison of Absorption and Variable Costing Let’s compare the methods.
Reconciliation We can reconcile the difference betweenabsorption and variable income as follows: Fixed mfg. overhead $150,000 Units produced 25,000 = = $6.00 per unit
Fixed costs arenot really the costsof any particularproduct. All manufacturing costsmust be assigned toproducts to properlymatch revenues and costs. VariableCosting AbsorptionCosting Variable versus Absorption Costing
Depreciation, taxes, insurance and salariesare just as essential to products as variable costs. These are capacitycosts and will beincurred if nothingis produced. VariableCosting AbsorptionCosting Variable versus Absorption Costing
Advantages of the Contribution Approach Consistent with CVP analysis. Management finds it easy to understand. Net income is closerto net cash flow. Consistent with standardcosts and flexible budgeting. Advantages Easier to estimate profitabilityof products and segments. Impact of fixed costs on profits emphasized. Profit is not affected bychanges in inventories.
Impact of JIT Inventory Methods In a JIT inventory system . . . Productiontends to equalsales . . . So, the difference between variable and absorption income tends to disappear.
