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Variable Costing: A Tool For Management

Variable costing differs from absorption costing in how it treats fixed manufacturing overhead costs. Absorption costing includes all manufacturing costs, including fixed overhead, as product costs. Variable costing only includes variable manufacturing costs like direct materials, labor, and variable overhead as product costs. This results in a lower per unit cost under variable costing compared to absorption costing. The document provides examples of the income statement formats under absorption and variable costing, with absorption costing including fixed overhead in the cost of goods sold and variable costing treating fixed overhead as a period expense.

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31 views12 pages

Variable Costing: A Tool For Management

Variable costing differs from absorption costing in how it treats fixed manufacturing overhead costs. Absorption costing includes all manufacturing costs, including fixed overhead, as product costs. Variable costing only includes variable manufacturing costs like direct materials, labor, and variable overhead as product costs. This results in a lower per unit cost under variable costing compared to absorption costing. The document provides examples of the income statement formats under absorption and variable costing, with absorption costing including fixed overhead in the cost of goods sold and variable costing treating fixed overhead as a period expense.

Uploaded by

Al Basti
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Variable Costing

A tool for Management


Learning Objective 1
• Explain how variable costing differs from absorption
costing
• And compute unit product costs under each method
Absorption Costing
• Absorption Costing treats all manufacturing costs as product costs,
regardless of whether they are variable or fixed.
• The cost of unit of product under absorption costing method consist
of Direct materials, Direct labour, and both Variable and Fixed
manufacturing overhead.
• Absorption costing includes all manufacturing costs in product costs,
it is frequently referred to as the Full cost method
Variable Costing
• Under variable costing, only those manufacturing cost that vary with
output are treated as product costs.
• It includes direct materials, Direct labor, and the variable portion of
manufacturing overhead.
• Variable costing is sometimes referred as Direct Costing or marginal
Costing.
Absorption Costing Unit product Cost
• Direct material XXX
• Direct Labor XXX
• Variable Manufacturing overhead XXX
• Fixed Manufacturing overhead XXX
• Absorption costing Unit product cost XXXX
Variable Costing Unit Product Cost
Direct Material XXX
Direct Labor XXX
Variable Manufacturing overhead XXX
Variable Costing Unit Product Cost XXX
Learning Objective 2
• Prepare Income statements using both variable
and absorption costing.
Absorption Costing Income Statement
• To prepare the company’s absorption costing income
statement
• We need to determine the company’s Unit product
cost, Cost of goods sold, and selling and
administrative expenses.
Absorption costing Income statement
format
Sales XXX
Cost of Goods Sold XXX
Gross Margin XXX
Selling and Admin Expenses XXX
Net operating Income (Loss) XXX
Variable Costing Contribution Format
Income Statement
• In variable costing, Fixed manufacturing overhead is
not included in product costs and instead is treated as
a period expense just like selling and administrative
expenses.
Variable Costing Contribution format
Income Statement
Sales XXX
Variable Expenses
Variable Cost of Goods sold XXX
Variable Selling and Admin Exp XXX
Total Variable Expenses XXX
Contribution Margin XXX
Fixed expenses
Fixed manufacturing overhead XXX
Fixed selling and Admin Exp XXX
Total Fixed Exp XXX
Net Operating Income (Loss)
Exercise Question.

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