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Management Advisory Services Notes

This document compares and contrasts absorption costing and variable costing methods. It defines the key components of each method including product costs, period costs, and the treatment of fixed overhead in inventory and net income calculations. It also shows how ending inventory balances impact the relationship between absorption and variable net income calculations.

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Kyla Roxas
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160 views2 pages

Management Advisory Services Notes

This document compares and contrasts absorption costing and variable costing methods. It defines the key components of each method including product costs, period costs, and the treatment of fixed overhead in inventory and net income calculations. It also shows how ending inventory balances impact the relationship between absorption and variable net income calculations.

Uploaded by

Kyla Roxas
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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NET INCOME NET INCOME

ABSORPTION VARIABLE
Sales Sales
(Cost of Goods Direct Materials (Variable Cost) Direct Materials
Sold) Direct Labor Direct Labor
Overhead – Variable & Fixed Overhead – Variable
(Manufacturing cost/Product cost) Selling and Administrative – Variable
Gross Profit Contribution
(Operating Selling and Administrative – Variable & Fixed Margin
Expenses) (Period cost) (Fixed Costs) Overhead – Fixed
Net Income Selling and Administrative – Fixed
Net Income

ABSORPTION VARIABLE
Product cost Direct Materials Product cost Direct Materials
Direct Labor Direct Labor
Overhead – Variable & Fixed Overhead – Variable

Period cost Selling and Administrative – Variable & Period cost Selling and Administrative – Variable & Fixed
Fixed Overhead – Fixed

ENDING INVENTORY
ABSORPTION & VARIABLE
Beginning Inventory (units) xx
Add: Production xx
Less: Sold (xx)
Ending Inventory (units) xx
Multiplied by: Product cost xx
Ending Inventory (peso value) xx
RECONCILIATION OF NET INCOME
ABSORPTION & VARIABLE
Net Income, Variable Net Income, Variable xx
xx
Add: Fixed cost in ending inventory xx Add: Units in ending inventory xx
(units in end, inventory*fixed overhead per unit) (units in end, inventory*fixed overhead per unit/fixed overhead per unit)
Less: Fixed cost in beginning inventory (xx) Less: Units in beginning inventory (xx)
(units in beg, inventory*fixed overhead per unit) (units in beg, inventory*fixed overhead per unit/fixed cost per unit)
Net Income, Absorption xx Net Income, Absorption xx

RELATIONSHIP BETWEEN PRODUCTION AND SALES NET INCOME INVENTORIES


P=S Absorption = Variable Ending inventory, bal. = Beginning inventory, bal.
P>S Absorption > Variable Ending inventory, bal. > Beginning inventory, bal.
P<S Absorption < Variable Ending inventory, bal. < Beginning inventory, bal.

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