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    Costman Variable Costing

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    Jeremi Bernardo
    Variable Costing (also known as direct costing) treats fixed manufacturing overhead as a period cost rather than a product cost. Absorption costing treats both variable and fixed manufacturing overhead as product costs. Under variable costing, the January income statement would show net income higher than under absorption costing because fixed factory overhead of $12,000 is treated as a period expense rather than allocated to the 15,000 units produced. The reconciliation of net income under the two methods adds beginning inventory fixed factory overhead and subtracts ending inventory fixed factory overhead from the absorption costing net income to arrive at the variable costing net income.

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    Costman Variable Costing

    Uploaded by

    Jeremi Bernardo
    18 views2 pages
    Variable Costing (also known as direct costing) treats fixed manufacturing overhead as a period cost rather than a product cost. Absorption costing treats both variable and fixed manufacturing overhead as product costs. Under variable costing, the January income statement would show net income higher than under absorption costing because fixed factory overhead of $12,000 is treated as a period expense rather than allocated to the 15,000 units produced. The reconciliation of net income under the two methods adds beginning inventory fixed factory overhead and subtracts ending inventory fixed factory overhead from the absorption costing net income to arrive at the variable costing net income.

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    all about COSTMAN-VARIABLE-COSTING

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    COSTMAN-VARIABLE-COSTING

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    Variable Costing (also known as direct costing) treats fixed manufacturing overhead as a period cost rather than a product cost. Absorption costing treats both variable and fixed manufacturing overhead as product costs. Under variable costing, the January income statement would show net income higher than under absorption costing because fixed factory overhead of $12,000 is treated as a period expense rather than allocated to the 15,000 units produced. The reconciliation of net income under the two methods adds beginning inventory fixed factory overhead and subtracts ending inventory fixed factory overhead from the absorption costing net income to arrive at the variable costing net income.

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    18 views2 pages

    Costman Variable Costing

    Uploaded by

    Jeremi Bernardo
    Variable Costing (also known as direct costing) treats fixed manufacturing overhead as a period cost rather than a product cost. Absorption costing treats both variable and fixed manufacturing overhead as product costs. Under variable costing, the January income statement would show net income higher than under absorption costing because fixed factory overhead of $12,000 is treated as a period expense rather than allocated to the 15,000 units produced. The reconciliation of net income under the two methods adds beginning inventory fixed factory overhead and subtracts ending inventory fixed factory overhead from the absorption costing net income to arrive at the variable costing net income.

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
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    Variable Costing (Direct Costing) is a method of reporting costs Capacities of production

    which regards only the variable manufacturing costs (direct Theoretical capacity – refers to the maximum level of activity
    materials, direct labor and variable factory overhead) as product without allowance for unavoidable interruptions so this is not
    costs. attainable.
    ➔ Fixed factory overhead is treated as period cost. It is Practical capacity – refers to the highest attainable capacity. It is
    not acceptable for external reporting and tax purposes. equal to theoretical capacity minus an allowance for unavoidable
    Absorption costing (also known as full costing, traditional, interruptions
    conventional and normal costing) is a method of product Expected actual capacity – refers to the estimated volume of
    costing in which all manufacturing costs (direct materials, direct activity for a given period in the immediate period.
    labor, Variable factory overhead & fixed factory overhead) are Actual capacity – refers to the capacity attained.
    treated as product costs or inventoriable costs. It is generally Normal capacity – refers to the average production level for a
    accepted for external reporting purposes. budget year considering the plant capacity and the demand for the
    product.
    Comparison between Variable Costing and Absorption Normal costing – refers to the assignment of unit cost under full
    Costing costing whereby factory overhead is charged to production at a
    1. As to treatment of the various operating costs: predetermined rate based on normal capacity
    Absorption Costing Variable Costing
    PRODUCT COSTS PRODUCT COSTS FOH Rate = Estimated or Budgeted Factory Overhead at Normal Capacity
    Estimated or Budgeted Base at Normal Capacity
    ● Direct Materials ● Direct Materials
    ● Direct labor ● Direct labor
    ● Variable ● Variable Volume or Capacity variance – due to over or under-absorption
    manufacturing manufacturing of fixed factory overhead.
    overhead overhead
    ● Fixed manufacturing Illustrative Problem:
    overhead Assume the following data for ABC Company for the months of
    January, February and March of the current year.
    PERIOD COSTS PERIOD COSTS

    ● Variable Selling & ● Fixed Manufacturing January February March


    administrative overhead
    expenses ● Variable Selling & Units Produced 15,000 16,000 12,000
    ● Fixed selling And administrative
    administrative expenses Units sold 15,000 12,000 14,000
    expenses ● Fixed selling And
    administrative Selling Price P25
    expenses per unit

    Direct 5
    2. As to net operating income Materials per
    unit
    Relationship between Net income
    Production (P)and Sales (S) Direct labor per 3
    unit
    Production = Sales (P=S) AC=VC
    Production > Sales (P>S) AC>VC Variable factory 3
    Production<Sales (P<S) AC<VC overhead per
    unit
    3. As to amount of inventory
    Inventory value under absorption costing would be higher in Variable selling 1
    amount than under the variable costing. expense per
    unit

    Reconciliation of Net income under Variable costing with Net Fixed factory 12,000
    Income Under Absorption Costing overhead per
    month
    Net Income, Absorption Php xxx
    Costing Fixed selling 10,000
    Add: Fixed Factory overhead xxx expenses per
    in beginning inventory month

    Total xxx
    Required:
    1. Prepare Income Statements for each month and three months combined
    Less: Fixed Factory overhead xxx under
    in ending inventory a. Variable Costing
    Net Income, Variable Costing xxx
    b. Absorption Costing

    2. Reconcile the net income under absorption costing with net income
    under variable costing.
    Format of variable Income Statement

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