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Direct Costing2

Variable costing assigns only variable manufacturing costs like direct materials and labor to products, while absorption costing assigns all manufacturing costs including fixed overhead. Absorption costing results in a higher per unit cost but matches costs to the period in which products are sold. For Fairchild Company, variable costing reports net income as $370,000 while absorption costing reports a higher net income of $420,000 due to the inclusion of a fixed portion of ending inventory in the absorption costing calculation.

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41 views11 pages

Direct Costing2

Variable costing assigns only variable manufacturing costs like direct materials and labor to products, while absorption costing assigns all manufacturing costs including fixed overhead. Absorption costing results in a higher per unit cost but matches costs to the period in which products are sold. For Fairchild Company, variable costing reports net income as $370,000 while absorption costing reports a higher net income of $420,000 due to the inclusion of a fixed portion of ending inventory in the absorption costing calculation.

Uploaded by

Lamtiur Lidiaq
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPT, PDF, TXT or read online on Scribd
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1

Chapter 15
2

Variable
Variable costing
costing
assigns
assigns only
only variable
variable
manufacturing
manufacturing costs
costs to
to
the
the product.
product.
Direct materials
Direct labor
Variable overhead
3

Absorption
Absorption costing
costing assigns
assigns
all
all manufacturing
manufacturing costs
costs to
to
the
the product;
product; this
this adds
adds fixed
fixed
overhead
overhead to
to the
the formula.
formula.
Direct materials
Direct labor
Variable overhead
Fixed overhead
4

Inventory Valuation
Units in beginning inventory ---
Units produced 10,000
Units sold ($300 each) 8,000
Normal volume 10,000

Variable
Fixed cost per unit:
costs:

Direct overhead
Fixed materials

$ 50
$250,000
Direct selling
Fixed labor and administrative
5

Unit
Unit Cost
Cost
Variable Absorption
costing costing
Direct materials $ 50 $ 50
Direct labor 100 100
Variable overhead 50 50
6

Unit
Unit Cost
Cost
Variable Absorption
costing costing
Direct materials $ 50 $ 50
Direct labor 100 100
Variable overhead 50 50
Fixed overhead 25
7

Unit
Unit Cost
Cost
Variable Absorption
costing costing
Direct materials $ 50 $ 50
Direct labor 100 100
Variable overhead 50 50
Fixed overhead 25

$250,000
$250,000
10,000
10,000
8

Unit
Unit Cost
Cost
Variable Absorption
costing costing
Direct materials $ 50 $ 50
Direct labor 100 100
Variable overhead 50 50
Fixed overhead 25
Total $200 $225
9

Fairchild Company
Variable-Costing Income Statement
Sales $2,400,000
Less variable expenses:
Variable cost of goods sold $1,600,000
Variable selling and admin. 80,000 1,680,000
Contribution margin $ 720,000
Less fixed expenses:
Fixed overhead $ 250,000
Fixed selling and admin. 150,000 350,000
Net income $ 370,000
10

Fairchild Company
Absorption-Costing Income Statement
Sales $2,400,000
Less: Cost of goods sold 1,800,000
Gross margin $ 600,000
Less: Selling and administrative exp. 180,000
Net income $ 420,000

Variable costing net income $370,000


Fixed portion of ending inventory
(2,000 units x $25) 50,000
Absorption costing net income $420,000
11

The
The End
End

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