Libby, Libby and ShortCHAPTER
1. Discuss the differences between variable and absorption costing.
2. Explain how variable costing is useful in evaluating the performance of a manager.
3. Prepare a segmented income statement based on a variable-costing approach, and demonstrate how to use this format with activity-based costing to assess customer profitability.
Objectives
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4. Show how variable costing can be used in planning and control.
Objectives
Variable costing assigns only variable manufacturing costs to the product.
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Absorption costing assigns all manufacturing costs to the product; this adds fixed overhead to the formula.
Direct materials
Direct labor
Variable overhead
Fixed overhead
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Normal volume 10,000
Fixed costs:
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Contribution margin $ 720,000
Less fixed expenses:
Fixed overhead $ 250,000
Net income $ 370,000
Gross margin $ 600,000
Net income $ 420,000
Fixed portion of ending inventory (2,000 units x $25) 50,000
Absorption costing net income $420,000
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If
Then
8
8
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Example
Data for Belnip, Inc., for years 2002, 2003, and 2004 follows:
Variable cost pr unit:
Variable selling and administrative 0.25
Estimated fixed overhead was $150,000 each year. Normal production was 150,000 units and the sales price was $10. Fixed selling and administrative expenses were $50,000.
Chapter 1 -
Variable selling and admin.
Gross margin
Net income
Absorption costing income – Variable costing income = Fixed overhead x (Units produced – Units sold)
$500,000 – $550,000 = $1 x (150,000 – 200,000)
2004
If income performance is expected to reflect managerial performance, then managers have the right to expect--
As sales revenue increases from one period to the next, all other things being equal, income should increase.
As sales revenue decreases from one period to the next, all other things being equal, income should decrease.
As sales revenue remains unchanged from one period to the next, all other things being equal, income should remain unchanged.
Chapter 1 -
Gross margin $ 50,000 $ -10,000 $ 40,000
Less: Selling and
Net income or loss $ 20,000 $ -30,000 $ -10,000
Stereos Video Recorders Total
Variable S & A -5,000 -10,000 -15,000
Contribution margin $ 95,000 $ 80,000 $175,000
Less direct fixed exp.:
Segment margin $ 55,000 $ 55,000 $110,000
Less common fixed exp.:
Common fixed OH -100,000
Common S & A -20,000
Stereos Video Recorders Total
Gross profit $1,811,250
Gross profit $1,225,000
Less: Commissions -131,250
Special packaging -35,000
Gross profit $ 70,000