MGA 202 Chapter 6 Variable Costing

How does one compute Unit Product cost under variable costing?

= (DM + DL + VOH) per unit

What is one advantage of variable costing versus absorption costing?

Avoiding distorted managerial incentives (Suppose a manager will receive a bonus based on absorption costing income. Will the manager want to increase or decrease production?)

How does one compute Cost of Goods sold under Variable costing?

COGS = unit product cost × units sold ***Pay attention to years when inventory goes down, because it means some of the units sold this year are from last year's production so the unit product cost for those units is from last year's calculation.

What are product costs under variable costing?

Direct Materials Direct Labor Variable Manufacturing Overhead

What are period costs under variable costing?

Fixed Manufacturing Overhead Variable Selling and Administrative Expenses Fixed Selling and Administrative Expenses

What is a key difference between Variable Costing and Full/Absorption costing

Only those manufacturing costs that vary with output are treated as product costs: • Direct materials • Direct labor • Variable portion of manufacturing overhead.

How does one compute sales under Variable Costing?

Sales = units sold × price per unit

Why do companies still use absorption costing?

1. To conform to GAAP requirements, absorption costing must be used for external financial reports in the United States. 2.Under the Tax Reform Act of 1986, absorption costing must be used when filing income tax returns.

How is a traditional format income statement prepared?

1.Sales 2.Cost of goods sold 3.Gross margin 4.Selling and administrative expenses 5.Net operating income

How is a contribution format income statement prepared?

1.Sales Variable expenses: 2.Variable COGS 3.Variable selling and administrative 4.Contribution margin Fixed expenses: 5.Fixed manufacturing overhead 6.Fixed selling and administrative 7.Net operating income

How does one figure Variable NOI (Net Operating Income) under variable costing?

= Contribution Margin - FMOH - Fixed SA

How does one compute period cost under Variable costing?

= Total SA expenses + FMOH

How does one compute contribution margin under variable costing?

Contribution Margin= Sales - Variable COGS - Variable SA

Why would using absorption costing rather than Variable benefit managers?

Even though the sold is the same, absorption costing income increases as production increases. Variable costing income is not affected by changes in production.

What is Contribution Margin?

Variable contribution margin is the margin that results when variable COGS and variable SA are subtracted from revenue