1 / 30

Describe and illustrate income reporting under variable costing and absorption costing.

Chapter 19 - Objectives. Describe and illustrate income reporting under variable costing and absorption costing. Describe and illustrate income analysis under variable costing and absorption costing. Two Costing Methods. Absorption Costing. Used for external financial reporting

shania
Download Presentation

Describe and illustrate income reporting under variable costing and absorption costing.

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Chapter 19 - Objectives • Describe and illustrate income reporting under variable costing and absorption costing. • Describe and illustrate income analysis under variable costing and absorption costing.

  2. Two Costing Methods Absorption Costing • Used for external financial reporting • Includes direct materials, direct labor, variable factory overhead, and fixed factoryoverhead as part of total product cost

  3. Two Costing Methods Variable Costing • Used for internalplanning and decision making • Does not include fixed factory overheadas a product cost

  4. Direct Materials Direct Labor Variable Factory OH Fixed Factory OH Period Expense Absorption Costing Compared to Variable Costing Absorption Costing Cost of Goods Manufactured Cost of Goods Manufactured Variable Costing

  5. Units Manufactured Equal Units Sold Variable Costing Income Statement Sales (15,000 x $50) $750,000 Variable cost of goods sold: Variable cost of goods mfg. (15,000 x $25) $375,000 Less ending inventory 0 Variable cost of goods sold 375,000 Manufacturing margin $375,000 Variable selling and administrative expenses (15,000 x $5) 75,000 Contribution margin $300,000 Fixed costs: Fixed manufacturing costs $150,000 Fixed selling and administrative expenses 50,000 200,000 Income from operations $100,000

  6. Units Manufactured Equal Units Sold Absorption Costing Income Statement Sales (15,000 x $50) $750,000 Cost of goods sold: Cost of goods manufactured (15,000 x $35) $525,000 Less ending inventory 0 Cost of goods sold 525,000 Gross profit $225,000 Selling and administrative expenses ($75,000 + $50,000) 125,000 Income from operations $100,000 Income from operations $100,000 When the number of units manufactured equals the number of units sold, income from operations will be the same under both methods.

  7. Units Manufactured Exceed Units Sold Variable Costing Income Statement Sales (12,000 x $50) $600,000 Variable cost of goods sold: Variable cost of goods manufactured (15,000 x $25) $375,000 Less ending inventory (3,000 x $25) 75,000 Variable cost of goods sold 300,000 Manufacturing margin $300,000 Variable selling and admin. expenses 60,000 Contribution margin $240,000 Fixed costs: Fixed manufacturing costs $150,000 Fixed selling and admin. expenses 50,000 200,000 Income from operations $ 40,000

  8. Absorption Costing Income Statement Units Manufactured Exceed Units Sold Sales (12,000 x $50) $600,000 Cost of goods sold: Cost of goods manufactured (15,000 x $35) $525,000 Less ending inventory (3,000 x $35) 105,000 Cost of goods sold 420,000 Gross profit $180,000 Selling and administrative expenses [(12,000 x $5) + $50,000] 110,000 Income from operations $ 70,000

  9. Units Manufactured Exceed Units Sold Operating Income: Absorption costing $70,000 Variable costing 40,000 Difference $30,000 Why is absorption costing income higher when units manufactured exceed units sold?

  10. Units Manufactured Exceed Units Sold Operating Income: Absorption costing $70,000 Variable costing 40,000 Difference $30,000 Analysis: Units manufactured 15,000 Units sold 12,000 Ending inventory units 3,000 Fixed cost per unit x $10 Difference $30,000

  11. Units Manufactured Are Less Than Units Sold Variable Costing Income Statement Sales (15,000 x $50) $750,000 Variable cost of goods sold: Beginning inventory (5,000 x $25) $125,000 Variable cost of goods manufactured (10,000 x $25) 250,000 375,000 Manufacturing margin $375,000 Variable selling and admin. expenses 75,000 Contribution margin $300,000 Fixed costs: Fixed manufacturing costs $150,000 Fixed selling and admin. expenses 50,000 200,000 Income from operations $100,000

  12. Units Manufactured Are Less Than Units Sold Variable Costing Income Statement Sales (15,000 x $50) $750,000 Variable cost of goods sold: Beginning inventory (5,000 x $25) $125,000 Variable cost of goods manufactured (10,000 x $25) 250,000 375,000 Manufacturing margin $375,000 Variable selling and admin. expenses 75,000 Contribution margin $300,000 Fixed costs: Fixed manufacturing costs $150,000 Fixed selling and admin. expenses 50,000 200,000 Income from operations $100,000

  13. Units Manufactured Are Less Than Units Sold Absorption Costing Income Statement Sales (15,000 x $50) $750,000 Cost of goods sold: Beginning inventory (5,000 x $35) $175,000 Cost of good manufactured (10,000 x $45) 400,000 Cost of goods sold 575,000 Gross profit $175,000 Selling and administrative expenses ($75,000 + $50,000) 125,000 Income from operations $ 50,000

  14. Units Manufactured Are Less Than Units Sold Operating Income: Variable costing $100,000 Absorption costing 50,000 Difference $ 50,000 Why is variable costing income higher when units manufactured are less than units sold?

  15. Operating Income: Variable costing $100,000 Absorption costing 50,000 Difference $ 50,000 Units Manufactured Are Less Than Units Sold Analysis: Units sold 15,000 Units manufactured 10,000 Beginning inventory units 5,000 Fixed cost per unit x $10 Difference $50,000

  16. IF Units Sold <Units produced THEN Variable Costing <Absorption Costing Income Income

  17. IF Units Sold >Units produced THEN Variable Costing >Absorption Costing Income Income

  18. Income Analysis Under Variable Costing and Absorption Costing Frand Manufacturing Company has no beginning inventory and sales are estimated to be 20,000 units at $75 per unit, regardless of production levels.

  19. Total Cost Unit Cost Manufacturing costs: Variable $ 700,000 $35 Fixed 400,000 20 Total costs $1,100,000 $55 Selling and administrative exp. Variable ($5 per unit sold) $ 100,000 Fixed 100,000 Total expenses $ 200,000 Income Analysis Under Variable Costing and Absorption Costing Proposal 1: 20,000 Units to Be Manufactured and Sold

  20. Total Cost Unit Cost Manufacturing costs: Variable $ 875,000 $35 Fixed 400,000 16 Total costs $1,275,000 $51 Selling and administrative exp. Variable ($5 per unit sold) $ 100,000 Fixed 100,000 Total expenses $ 200,000 Income Analysis Under Variable Costing and Absorption Costing Proposal 2: 25,000 Units to Be Manufactured; 20,000 Units to Be Sold

  21. Frand Manufacturing Company Absorption Costing Income Statements 20,000 Units Manufactured 25,000 Units Manufactured Sales $1,500,000$1,500,000 Cost of goods sold: Cost of goods manufactured (20,000 units x $55) $1,100,000

  22. Frand Manufacturing Company Absorption Costing Income Statements 20,000 Units Manufactured 25,000 Units Manufactured Sales $1,500,000$1,500,000 Cost of goods sold: Cost of goods manufactured (20,000 units x $55) $1,100,000 (25,000 units x $51) $1,275,000

  23. Frand Manufacturing Company Absorption Costing Income Statements 20,000 Units Manufactured 25,000 Units Manufactured Sales $1,500,000$1,500,000 Cost of goods sold: Cost of goods manufactured (20,000 units x $55) $1,100,000 (25,000 units x $51) $1,275,000 Less ending inventory: (5,000 units x $51) 255,000 Cost of goods sold $1,100,000$1,020,000 Gross profit $ 400,000 $ 480,000 Selling and administrative expenses ($100,000 + $100,000) 200,000 200,000 Income from operations $ 200,000 $ 280,000

  24. Frand Manufacturing Company Variable Costing Income Statements 20,000 Units Manufactured 25,000 Units Manufactured Sales $1,500,000$1,500,000 Variable cost of goods sold: Variable cost of goods manufactured: (20,000 units x $35) $ 700,000 (25,000 units x $35) $ 875,000

  25. Frand Manufacturing Company Variable Costing Income Statements 20,000 Units Manufactured 25,000 Units Manufactured Sales $1,500,000$1,500,000 Variable cost of goods sold: Variable cost of goods manufactured: (20,000 units x $35) $ 700,000 (25,000 units x $35) $ 875,000 Less ending inventory: (0 units x $35) 0 (5,000 units x $35) 175,000 Variable cost of goods sold $ 700,000$ 700,000 Manufacturing margin $ 800,000 $ 800,000 Continued

  26. Frand Manufacturing Company Variable Costing Income Statements 20,000 Units Manufactured 25,000 Units Manufactured Manufacturing margin $ 800,000 $ 800,000 Variable selling and administrative expenses 100,000 100,000 Contribution margin $ 700,000$ 700,000 Fixed costs: Fixed manufacturing costs $ 400,000 $ 400,000 Fixed selling and administrative expenses 100,000 100,000 Total fixed costs $ 500,000$ 500,000 Income from operations $ 200,000 $ 200,000

  27. Frand Manufacturing Company Variable Costing Income Statements 30,000 Units Manufactured Suppose 30000 units were manufactured Sales $1,500,000 Variable cost of goods sold: Variable cost of goods manufactured: (30,000 units x $35) $1,050,000 Less ending inventory: (10,000 units x $35) 350,000 Variable cost of goods sold $ 700,000 Manufacturing margin $ 800,000 Continued

  28. Frand Manufacturing Company Variable Costing Income Statements 30,000 Units Manufactured Manufacturing margin $ 800,000 Variable selling and administrative expenses 100,000 Contribution margin $ 700,000 Fixed costs: Fixed manufacturing costs $ 400,000 Fixed selling and administrative expenses 100,000 Total fixed costs $ 500,000 Income from operations $ 200,000

  29. Management’s Use of Costing Methods Variable costingreports and absorption costingreports are useful in the following situations: 1. Controlling costs 2. Pricing products 3. Planning production 4. Analyzing market segments 5. Analyzing contribution margins

  30. Absorption Costing and Variable Costing MANAGEMENT Accounting Reports and Management Decisions ACCOUNTING REPORTS

More Related