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
