CHAPTER 5
Variable Costing
Full (Absorption) Costing
Inventory Costs Include:
 Direct Material
 Direct Labor
 All Manufacturing Overhead
Variable and Fixed Cost elements are
combined in Manufacturing Overhead
Required for GAAP
Full (Absorption) Costing
Variable Costing
Inventory Includes:
 Direct Material
 Direct Labor
 Variable Manufacturing Overhead
Enables organization to perform
“what if” analysis
Not allowed for GAAP
Variable Costing
Differences Between Full and
Variable Costing
 Fixed Manufacturing Overhead
 Under Full Costing, it is included in
inventory and expensed when
product is sold.
 Under Variable Costing, it is
considered a period expense and
expensed on the income statement
in the period incurred.
Variable Costing Income
Statement
 Utilizes contribution margin
approach
 All costs are classified as fixed or
variable costs
Variable Costing Income
Statement Example
Full Costing Income Statement
Example
Study Break #1
Which of the following complies
with GAAP for external reporting
purposes?
a.Absolute costing
b.Variable costing
c.Fixed costing
d.Full costing
Answer:
d. Full costing
Study Break #2
Which of the following lends itself
well to internal decision making?
a.Absolute costing
b.Variable costing
c.Fixed costing
d.Full costing
Answer:
b. Variable costing
ClausenTube Example - Facts
ClausenTube Example
Quantity Produced = Quantity Sold
 Full Costing Income Statement
ClausenTube Example
Quantity Produced = Quantity Sold
 Variable Costing Income Statement
ClausenTube Example
Quantity Produced > Quantity Sold
 Full Costing Income Statement
ClausenTube Example
Quantity Produced > Quantity Sold
 Variable Costing Income Statement
Variable Costing for External
Reporting
Example Exercise Information
Summit Manufacturing, Inc. produces snow
shovels. The selling price per snow shovel is
$25. Costs involved in production are:






Direct material
$4
Direct labor
$3
Variable manufacturing overhead
$2
Total variable manufacturing cost per unit
$9
Fixed manufacturing overhead per year $168,000
Fixed selling and administrative costs
$152,000
Example Exercise #1
During the year, Summit produces
42,000 snow shovels and sells
38,500 snow shovels. What is net
income using full costing?
Example Exercise #1 Solution
Net Income using Full Costing
Sales ($25 x 38,500)
$962,500
Cost of Goods Sold ($13 x 38,500)
$500,500
Gross Margin
$462,000
Less Selling and Administrative Expense $152,000
Net Income
$310,000
Example Exercise #2
During the year, Summit produces
42,000 snow shovels and sells
38,500 snow shovels. What is net
income using variable costing?
Example Exercise #2 Solution
Net Income using Variable Costing
Sales ($25 x 38,500)
Less Variable COGS ($9 x 38,500)
Contribution Margin
Less Fixed Costs:
Fixed Manufacturing Overhead
Fixed Selling and Administrative
Net Income
$962,500
$346,500
$616,000
$168,000
$152,000
$296,000
Impact of Method Selection on
Income Statement
Units Produced = Units Sold
 No difference in income
Units Produced > Units Sold
 Full costing yields higher income
Units Produced < Units Sold
 Variable costing yields higher income
Reducing Production
Impact of JIT on Income Effects
 Companies using JIT typically have
low levels of inventory.
 Units produced are approximately
equal to units sold
 Difference between full and variable
costing is likely to be very small.
Benefits of Variable Costing for
Internal Reporting
Variable Costing Facilitates C-V-P
Analysis
 Separates fixed and variable costs
Variable Costing Limits Management
of Earnings with Production Volume
 Does not allow management to inflate
earnings
Study Break #3
If units produced exceed units sold:
a. Full costing yields a higher income than
variable costing
b. Full costing yields a lower income than
variable costing
c. Full costing and variable costing yield the
same income
d. Variable costing yields a higher income than
full costing
Answer:
a. Full costing yields a higher income
than variable costing
Study Break #4
If units produced are less than units sold:
a. Full costing yields a higher income than
variable costing
b. Full costing yields a lower income than
variable costing
c. Full costing and variable costing yield the
same income
d. Variable costing yields a lower income than
full costing
Answer:
b. Full costing yields a lower income than
variable costing
Impact of Changes in Sales
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