Ch. 06: Variable Costing: A Tool for Management

Introduction:

Income is one of the most important measures used to evaluate the performance of companies يعتبر الربح من أهم المقاييس التي تستخدم لتقديم أداء المنشآت

Income Statement:

Sales revenue

(-) Cost of Goods Sold

(=) Gross Profit

Cost of Beginning Finished Inventory

(+) Cost of goods manufactured (Production * Cost per unit)

(-) Cost of ending finished goods inventory

(=) Cost of goods sold

Total / Per Unit / Total / Per Unit
D.M / $20,000 / $2.00 / D.M / $20,000 / $2.00
D.L / $10,000 / $1.00 / D.L / $10,000 / $1.00
V.O.H / $5,000 / $0.50 / V.O.H / $5,000 / $0.50
F.O.H / $5,000 / $0.50 / 0 / 0
= Product Cost / $40,000 / $4.0 / = Product Cost / $35,000 / $3.5

Notes:

1-  FOH per unit = FOH / Production (units)

2-  Product cost per Unit = Product costs / Production (units)

3-  Ending inventory (units) = Beginning inv (units) + Production (units) – Sales (units)

4-  Cost of ending inventory = Ending inventory * Product cost per unit

5-  Cost of Goods Sold = Sales (units) * Product cost per unit

·  The difference between two methods is in determining product cost per unit, which affect in determining Cost of goods sold and Inventorable cost

·  The difference in determining Product cost per unit between the two methods is the fixed overhead per unit.

الفرق في تحديد تكلفة الإنتاج ينشأ من معالجة التكاليف الصناعية الإضافية الثابتة

Income Statement Under Absorption Costing System:

Sales Revenue / [ Units Sold * Price Per Unit]
[ 15,000 units * $10 ] / 150,000
(-) Cost of Goods Sold
Cost of Beg F.G Inventory / [ Beg Inv (units) * Product cost / Unit ]
10,000 units * $2 (Last year) / 20,000
(+) Cost of Goods Manufactured / [ Production (units) * Product cost/U]
10,000 units * $4 (current year) / 40,000
(- ) Cost of End F.G Inventory / [ End Inv (units) * Product Cost / U]
[ 5,000 units * $4 ] (current year) / -20,000
40,000
(=) Gross Profit [Margin] / 110,000
(-) Selling and Administrative
Variable Selling & Administrative / [ units sold * Variable S&A Per Unit]
[ 15,000 * $3 ] / 45,000
Fixed Selling & Administrative / 22,000
67,000
(=) Absorption Net Income / 43,000

Income Statement Under Variable Costing System:

Sales Revenue / [ Units Sold * Price Per Unit] / 150,000
[ 15,000 units * $10 ]
(-) Total Variable Costs:
Variable Cost of Goods Sold
Cost of Beg F.G Inventory / [ Beg Inv (units) * Product cost / Unit ] / 15,000
10,000 units * $1.5 (Last year)
(+) Cost of Goods Manufactured / [ Production (units) * Product cost/U] / 35,000
10,000 units * $3.5 (Current year)
(- ) Cost of End F.G Inventory / [ End Inv (units) * Product Cost / U] / -17,500
[ 5,000 units * $3.5 ] (Current year)
32,500
Variable Selling & Admin. / [ Units Sold * Variable S&A Per Unit] / 45,000
(=) Total Contribution Margin / 72,500
(-) Total Fixed Costs:
Fixed Manufacturing Overhead / 5,000
Fixed Selling & Administrative / 22,000
27,000
(=) Variable Net Income / 45,500

Difference in Net Income = Change in Inventory * FOH Rate ( Per unit)

= (End Inv – Beg Inv ) * ( FOH / Production )

If Result is Positive (+) : ABS(NI) > VAR(NI)

If Result is Negative (-) : ABS(NI) < VAR(NI)

The Reconciliation of the variable and Absorption net income:

Variable Costing Net operating Income / 000
Add: FOH Deferred in Inventory under ABS
(Increase in Inv * FOH Rate) / 0
Less: FOH Released in Inventory Under ABS
( Decrease in Inv * FOH Rate)
(=) Absorption Costing Net operating Income / 0000

Or we can make it as follows:

Variable Costing Net operating Income
Add: FOH (Deferred / Released )in Inventory
(End Inv – Beg Inv ) FOH Rate
(=) Absorption Costing Net operating Income

Important Note :

If there are :

EXERCISE 6–7

Maxwell Company manufactures and sells a single product. The following costs were incurred during the company’s first year of operations:

During the year, the company produced 20,000 units and sold 16,000 units. The selling price of the company’s product is $50 per unit.

Required:

1.  Compute the unit product cost under absorption costing and variable costing.

2.  Prepare an income statement for the year under absorption costing and variable costing.

3.  Compute the difference between net income under absorption costing and variable costing.

4.  Reconcile the net income.

EXERCISE 6–3

High Tension Transformers, Inc., manufactures heavy-duty transformers for electrical switching stations. The company uses variable costing for internal management reports and absorption costing for external reports to shareholders, creditors, and the government. The company has provided the following data:

The company’s fixed manufacturing overhead per unit was constant at $450 for all three years.

Required:

1.  Determine each year’s absorption costing net operating income. Present your answer in the form of a reconciliation report.

2.  In Year 4, the company’s variable costing net operating income was $240,200 and its absorption costing net operating income was $267,200. Did inventories increase or decrease during Year 4? How much fixed manufacturing overhead cost was deferred or released from inventory during Year 4?

PROBLEM 6–18

During Denton Company ’s first two years of operations, the company reported absorption costing

net operating income as follows:

The company’s $34 unit product cost is computed as follows:

Production and cost data for the two years are given below:

Required:

1. Prepare a variable costing contribution format income statement for each year.

2. Reconcile the absorption costing and variable costing net operating income figures for each year.

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