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Overview
Full (Absorption) Costing Variable (Direct) Costing Differences Between Full (Absorption) Costing and Variable (Direct) Costing
12,000
12,000
$6,000
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Definition of Product Cost; Class Example Accounting for Fixed Overhead; Class Example Operating Income ; Reconciliation of Absorption and Direct Costing Income
production capacity = 10,000 units selling price = $20 per unit variable mfg costs (relevant range = 5,000 to 10,000 units): direct materials = $4 per unit direct labour = $3 per unit variable manufacturing overhead = $1 per unit fixed manufacturing overhead = $50,000 variable selling and administrative costs = $2 per unit fixed selling and administrative costs = $15,000
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13
Manufacturing CGS
Inventory
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Manufacturing CGS
Inventory
15
Manufacturing CGS
Inventory
16
Manufacturing CGS
Inventory
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Manufacturing CGS
Inventory
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Manufacturing CGS
Inventory
= = = =
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Manufacturing CGS
Inventory
= = = =
Direct Costing
fixed OH period costs
Fixed OH in inventory
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Operating Income
Absorption Costing
Traditional Approach Costs/Expenses classified on the basis of Cost Function (manufacturing vs. non-manufacturing) Contribution Approach Costs/Expenses classified on the basis of Cost Behaviour (variable vs. fixed)
26
Direct Costing
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Fixed manufacturing costs (manufacturing) Fixed SG&A expenses (nonmanufacturing) Operating income
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Contribution margin = sales variable costs Contribution margin ratio = contribution margin / sales Variable cost ratio = variable cost / sales
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Income Statement
Absorption Costing (Traditional Approach) Sales CGS Gross profits SG&A expenses Operating income
Direct Costing (Contribution Approach) Sales Variable costs Contribution margin
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Sales CGS Gross profits SG&A expenses Variable SG&A Fixed SG&A SG&A expenses Operating income
Sales Variable costs Variable mfg CGS Variable SG&A Total variable costs Contribution margin Fixed costs Fixed mfg costs Fixed SG&A Total fixed costs Operating income
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Sales CGS Gross profits SG&A expenses Variable SG&A Fixed SG&A SG&A expenses Operating income
Sales Variable costs Variable mfg CGS Variable SG&A Total variable costs Contribution margin Fixed costs Fixed mfg costs Fixed SG&A Total fixed costs Operating income
32
Class Example Absorption vs Direct Costing; Reconciliation of Absorption and Direct Costing Income
Sales CGS Gross profits SG&A expenses Variable SG&A Fixed SG&A SG&A expenses Operating income
Sales Variable costs Variable mfg CGS Variable SG&A Total variable costs Contribution margin Fixed costs Fixed mfg costs Fixed SG&A Total fixed costs Operating income
$152,000
$60,800 15,200 $76,000 $76,000 $50,000 15,000 $65,000
33 $11,000
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Timing Difference
The difference between absorption and direct costing income is temporary as it will reverse from period to period depending on the relationship between production and sales units.
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Y Current Production
Current Production
Z
expensed in I/S
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Absorption Costing Income (ACI) = Income before fixed OH X - Y Direct Costing Income (DCI)
Income before fixed OH = ACI + X + Y = DCI + Y + Z ACI + X = DCI + Z ACI = DCI + Z - X DCI = ACI + X - Z
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