Accounting Chap 6

equation to find fixed overhead cost that is deferred or released

(#produced-#sold) x (fixed overhead $)/(units produced)

variable =

CM

unit product cost under variable costing

DM + DL + Var. MOH based on units produced

unit product cost under absorption costing

DM + DL + Var. MOH + fixed MOH based on units produced

Income Statement using variable costing

Sales -VC (includes var. cogs and var. sell/admin) =CM - FC (includes fixed MOH/ fixed sell/admin) =NOI

Income statement using absorption costing

Sales -COGS =Gross Margin =Selling and admin =NOI

net income can appear higher if

a company produced more than they sold

when the produced and unit sales are equal, no change in inventories occurs and

absorption costing and variable costing net operating incomes are the same

and in contrast, under variable

all fixed mOH appears

what format is easiest to perform CVP analysis

because variable costing categorizes fixed and variable moh, it is much easier to use this income statement format

variable format

costs are categorized by behavior all variable expenses are listed together and all fixed expenses are listed together. variable expenses category includes manufacturing costs and selling and admin. The fixed expense category also includes both manufacturing cost and selling and admin

absorption format

costs are categorized by function: all manufacturing costs flow through the absorption costs of goods sold and all selling and admin expense are listed separately as period expenses

in absorption costing some of the fixed moh of the current period will be

deferred in ending inventories

what does variable costing include

direct materials, direct labor, and variable portion of manufacturing overhead

cost of unit product under absorption is

direct materials, direct labor, variable and fixed MOH

the difference in the two methods is how they account for

fixed MOH

units produced > units sold

fixed overhead cost is deferred in inventory

units produced < units sold

fixed overhead cost is released

when units produced exceeds unit sales and inventories increase...

net operating income is higher under absorption costing than variable

when units sales exceed units produced and inventories decrease...

net operating income is lower under absorption costing than under variable

Variable cogs

number of units sold x unit product cost under variable costing

absorption cogs

number of units sold x units product cost under absorption costing

variable costing

only those manufacturing costs that vary with output are treated as product costs (only variable MOH is product cost)

absorption=

traditional

absorption costing

treats all manufacturing costs as product costs, regardless of whether they are variable or fixed

how are variable and fixed sell/admin treated

under absorption and variable costing, selling and admin are always treated as period costs and are expensed as incurred

Reconciling net operating income between variable and absorption costing

variable costing NOI +fixed overhead cost deferred or - fixed overhead cost released = absorption costing NOI

absorption is tricky because...

when more units are produced than sold, the net income is higher but these costs will eventually flow through to the income statements in a later period when inventories decrease