Variable Costing and
Analysis
Chapter 6
Wild and Shaw
Managerial Accounting
5th Edition
Copyright © 2016 McGraw-Hill Education. All rights reserved. No
reproduction or distribution without the prior written consent of
McGraw-Hill Education.
1
6-P1: Compute unit cost
under both absorption and
variable costing.
3
Absorption Costing &
Variable Costing
Absorption costing (also called full
costing), assumes that products
absorb all costs incurred to
produce them.
While widely used for financial reporting (GAAP), this
costing method can result in misleading product cost
information for managers’ business decisions.
•
P1
3
Absorption Costing &
Variable Costing
Under variable costing, only
costs that change in total with
changes in production level
are included in product costs.
P1
4
Distinguishing between Absorption Costing
and Variable Costing: Absorption Costing
(Based on Exhibit 6.1)
Absorption Costing
Direct
Materials
Direct
Labor
Variable
Overhead
Fixed
Overhead
Product Cost
P1
5
Distinguishing between Absorption Costing
and Variable Costing: Variable Costing
(Based on Exhibit 6.1)
Variable Costing
Direct
Materials
Direct
Labor
Product Cost
Variable
Overhead
Fixed
Overhead
Period Cost
P1
6
Difference between Absorption Costing and Variable
Costing: Computing Unit Cost
Exhibit 6.2 Summary Product Cost Data
Direct materials cost………………………………………….
$4 per unit
Direct labor cost………………………………………….
$8 per unit
Overhead cost
Variable overhead cost……………………………………..
$180,000
Fixed overhead cost…………………………………………..
600,000
Total overhead cost…………………………………………..
$780,000
Expected units produced…………………………………..
60,000 units
P1
7
Difference between Absorption Costing and Variable
Costing: Computing Unit Cost
Exhibit 6.2 Summary Product Cost Data
Direct materials cost………………………………………….
$4 per unit
Direct labor cost………………………………………….
$8 per unit
Overhead cost
Variable overhead cost……………………………………..
$180,000
Fixed overhead cost…………………………………………..
600,000
Total overhead cost…………………………………………..
$780,000
Expected units produced…………………………………..
60,000 units
Variable OH cost per unit:
$180,000/ 60,000 units = $3/unit
Fixed OH cost per unit:
$600,000/ 60,000 units = $10/unit
Exhibit 6.3 Unit Cost Computation
Absorption Variable
Costing Costing
Direct materials cost per unit……………...
$4
$4
Direct labor cost per unit………….
8
8
Overhead cost
Variable overhead cost per unit…..
3
3
Fixed overhead cost per unit……...
10
Total product cost per unit…………….
$25
$15
P1
8
NEED-TO-KNOW
A manufacturer reports the following data.
Direct materials
Direct labor
Overhead costs:
Variable overhead
Fixed overhead
Expected units produced
$6.00 per unit
$14.00 per unit
$220,000 per year
$680,000 per year
20,000 units
$220,000 / 20,000 units = $11 per unit
$680,000 / 20,000 units = $34 per unit
1) Compute the total product cost per unit under absorption costing.
2) Compute the total product cost per unit under variable costing.
$6.00
$6.00
$14.00
$14.00
$31.00 per unit
$65.00 per unit
$11.00
$11.00
$34.00
$34.00
P1
Copyright © 2015 McGraw-Hill Education
9
Analysis of Income Reporting for Both
Absorption and Variable Costing
Summary Cost Information for 2013-2015
Manufacturing Costs
Direct materials cost
Direct labor cost
Variable overhead cost
$4 per unit
$8 per unit
$3 per unit
Fixed overhead cost
$600,000 per year
Selling and Administrative Expenses
Variable expenses
$2 per unit
Fixed expenses
$200,000 per year
Units Produced Units Sold Units in Ending Inventory
2013
2014
2015
60,000
60,000
60,000
60,000
40,000
80,000
0
20,000
0
P1
10
6-P2: Prepare and analyze an
income statement using absorption
costing and using variable costing.
11
Analysis of Income Reporting for Absorption
Costing: Units Produced Equal Units Sold
Exhibit 6.4 Income for 2013 ----Quantity Produced Equals Quantity Sold†
IceAge Company
Income Statement (Absorption Costing)
For Year Ended December 31, 2013
Sales (60,000 x $40)…………………………………………………………..
Cost of goods sold (60,000 x $25*)……………………………………………
Gross margin……………………………………………………………………
Selling and administrative expenses [$200,000 + (60,000 x $2)]…………
Net income………………………………………………………………………..
$2,400,000
1,500,000
900,000
320,000
$580,000
Notice that the net income is $580,000
*Units produced equal 60,000; units sold equal 60,000.
† See Exhibit 6.3 for unit cost computation under absorption and variable costing.
P2
12
Analysis of Income Reporting for Variable
Costing: Units Produced Equal Units Sold
Exhibit 6.4 Income for 2013-----Quantity Produced Equals Quantity Sold
IceAge Company
Income Statement (Variable Costing)
For Year Ended December 31, 2013
Sales (60,000 x $40)
$2,400,000
We can see that the income under variable
Variable expenses
Variable production costs costing is also $580,000. This is because
(60,000 x $15*)
$900,000
the
number
of units produced are equal to
Variable selling and administrative
the number of units sold.
expenses (60,000 x $2)
120,000
1,020,000
Contribution margin
1,380,000
Fixed expenses
Fixed overhead
600,000
Fixed selling and
administrative expense
200,000
$800,000
Net income
$580,000
P2
A performance report that excludes fixed expenses and net income is a contribution
margin report. It’s bottom line is contribution margin.
13
Contribution Margin Report
IceAge Company
Contribution Margin Report
For the Year Ended December 31, 2013
Sales
$ 2,400,000
Variable Expenses
Variable production costs
$900,000
Variable selling expenses
120,000 1,020,000
Contribution margin
$ 1,380,000
Sales
- Variable expenses
= Contribution margin
**Contribution margin contributes
to covering fixed costs and earning
income
P2
14
Analysis of Income Reporting for Both
Absorption and Variable Costing:
Units Produced Equal Units Sold
Exhibit 6.5 Production Cost Assignment for 2013
Cost of Goods Sold
Ending Inventory
Period Cost
(Expense)
(Asset)
(Expense)
Absorption Costing
Direct materials
60,000 x $4
$ 240,000
0 x $4 $0
Direct labor
60,000 x $8
480,000
0 x $8
0
Variable overhead
60,000 x $3
180,000
0 x $3
0
Fixed overhead
60,000 x $10
600,000
0 x $10 0
Total costs
1,500,000
0
$240,000
480,000
180,000
600,000
$1,500,000
Variable Costing
Direct materials
Direct labor
Variable overhead
Fixed overhead
Total costs
$240,000
480,000
180,000
600,000
$1,500,000
Cost difference
60,000 x $4
60,000 x $8
60,000 x $3
$ 240,000
480,000
180,000
$900,000
0 x $4 $0
0 x $8 0
0 x $3 0
0
$600,000
$600,000
Total
Expense
$0
P2
15
Analysis of Income Reporting for Variable
Costing: Units Produced Exceed Units Sold
Exhibit 6.6 Income for 2014-----Quantity Produced Equals Quantity Sold
IceAge Company
Income Statement (Variable Costing)
For Year Ended December 31, 2014
Sales (40,000 x $40)
Variable expenses
Variable production costs
(40,000 x $15*)
$600,000
Variable selling and administrative
expenses (40,000 x $2)
80,000
Contribution margin
Fixed expenses
Fixed overhead
600,000
Fixed selling and
administrative expense
$200,000
Net income
$1,600,000
680,000
920,000
$800,000
$120,000
P2
16
Analysis of Income Reporting for Absorption
Costing: Units Produced Exceed Units Sold
Exhibit 6.6 Income for 2014----Quantity Produced Exceeds Quantity Sold†
IceAge Company
Income Statement (Absorption Costing)
For Year Ended December 31, 2014
Sales (40,000 x $40)
Cost of goods sold (40,000 x $25*)
Gross margin
Selling and administrative expenses [$200,000 + (40,000 x $2)]
Net income
$1,600,000
1,000,000
600,000
280,000
$320,000
Income for 2014 is $320,000
*Units produced equal 60,000; units sold equal 40,000.
† See Exhibit 6.2 for unit cost computation under absorption and variable costing.
P2
17
Analysis of Income Reporting for Variable
Costing: Units Produced Exceed Units Sold
Exhibit 6.6 Income for 2014----Quantity Produced Exceeds Quantity Sold
IceAge Company
Income Statement (Variable Costing)
For Year Ended December 31, 2014
Sales (40,000 x $40)
Variable expenses
Variable production costs
(40,000 x $15*)
$600,000
Variable selling and administrative
Under variable costing, the
expenses (40,000 x $2)
80,000
net
income
is only $120,000
Contribution margin
Fixed expenses
Fixed overhead
600,000
Fixed selling and
administrative expense
200,000
Net income
P2
$1,600,000
680,000
920,000
800,000
$120,000
18
Analysis of Income Reporting for Variable
Costing: Units Produced Exceed Units Sold
Exhibit 6.6 Income for 2014 ---Quantity Produced Exceeds Quantity Sold
IceAge Company
Income Statement (Variable Costing)
For Year Ended December 31, 2014
Sales (40,000 x $40)
Variable expenses
Variable production costs
(40,000 x $15*)
$600,000
Variable selling and administrative
expenses (40,000 x $2)
80,000
Contribution margin
Fixed expenses
Fixed overhead
600,000
Fixed selling and
administrative expense
200,000
Net income
P2
$1,600,000
Under absorption
costing,$200,000 of fixed
overhead is allocated to the
20,000 units in ending inventory
and is not expensed until680,000
future
920,000
periods. Variable costing
expenses the entire $600,000 of
fixed overhead.
800,000
$120,000
19
Analysis of Income Reporting for Both
Absorption and Variable Costing: Units
Produced Exceed Units Sold
Exhibit 6.7 Production Cost Assignment for 2014
Cost of Goods Sold
(Expense)
Absorption Costing
Ending Inventory
(Asset)
Direct materials
Direct labor
Variable overhead
Fixed overhead
Total costs
Period Cost
(Expense)
Total
Expense
40,000 x $4
40,000 x $8
40,000 x $3
40,000 x $10
$ 160,000
320,000
120,000
400,000
$1,000,000
20,000 x $4 $ 80,000
20,000 x $8
160,000
20,000 x $3
60,000
20,000 x $10
200,000
$500,000
$160,000
320,000
120,000
400,000
$1,000,000
40,000 x $4
40,000 x $8
40,000 x $3
$ 160,000
320,000
120,000
________
20,000 x $4 $ 80,000
20,000 x $8
160,000
20,000 x $3
60,000
_______
$600,000
$160,000
320,000
120,000
600,000
$600,000
$300,000
$600,000
$1,200,000
Variable Costing
Direct materials
Direct labor
Variable overhead
Fixed overhead
Total costs
Cost difference
($200,000)
P2
20
Analysis of Income Reporting for Absorption Costing:
Units Produced Are Less Than Units Sold
Exhibit 6.8 Income for 2015—Quantity Produced is Less Than Quantity Sold†
IceAge Company
Income Statement (Absorption Costing)
For Year Ended December 31, 2015
Sales (80,000 x $40)
Cost of goods sold (80,000 x $25*)
Gross margin
Selling and administrative expenses [$200,000 + (80,000 x $2)]
Net income
$3,200,000
2,000,000
1,200,000
360,000
$840,000
Income is now $840,000
*Units produced equal 60,000; units sold equal 80,000.
†
See Exhibit 6.3 for unit cost computation under absorption and variable costing.
P2
21
Analysis of Income Reporting for Variable Costing:
Units Produced Are Less Than Units Sold
Exhibit 6.8 Continued
IceAge Company
Income Statement (Variable Costing)
For Year Ended December 31, 2015
Sales (80,000 x $40)
Variable expenses
Variable production costs (80,000 x $15*)
$1,200,000
Variable selling and administrative expenses ($80,000 x $2)
160,000
Contribution margin
Fixed expenses
Fixed overhead
600,000
Income under variable
Fixed selling and
costing is $1,040,000
administrative expense 200,000
Net income
$3,200,000
1,360,000
1,840,000
800,000
$1,040,000
P2
22
Analysis of Income Reporting for Both
Absorption and Variable Costing: Units
Produced Are Less Than Units Sold
Exhibit 6.9 Production Cost Assignment for 2015
Cost of Good Sold
(Expense)
Absorption Costing
Direct materials
Direct labor
Variable overhead
Fixed overhead
Total costs
Ending Inventory
(Asset)
Period Cost
(Expense)
Total
Expense
80,000 x $4
80,000 x $8
80,000 x $3
80,000 x $10
$ 320,000
640,000
240,000
800,000
$2,000,000
0 x $4
0 x $8
0 x $3
0 x $10
$0
0
0
0
$0
$ 320,000
640,000
240,000
800,000
$ 2,000,000
80,000 x $4
80,000 x $8
80,000 x $3
$ 320,000
640,000
240,000
________
0 x $4
0 x $8
0 x $3
$0
0
0
Variable Costing
Direct materials
Direct labor
Variable overhead
Fixed overhead
Total costs
Cost difference
$1,200,000
___
$600,000
$320,000
640,000
240,000
600,000
$0
$600,000
$1,800,000
$ 200,000
P2
23
Summarizing Income Reporting
Exhibit 6.10 Summary of Income Statements
Units Produced
Income for
Income for
and Sold
Absorption Costing Variable Costing Difference
2013 Units produced: 60,000
$580,000
$580,000
$0
Units sold: 60,000
2014 Units produced: 60,000
320,000
120,000
200,000
Units sold: 40,000
2015 Units produced: 60,000
840,000
1,040,000
-200,000
Units sold: 80,000
Totals Units produced: 180,000
Units sold: 180,000
$1,740,000
$1,740,000
$0
P2
24
NEED-TO-KNOW
Zbest Manufacturing reports the following costing data for the current year. 20,000 units were produced,
and 14,000 units were sold.
Direct materials per unit
$6 per unit
Direct labor per unit
$11 per unit
Variable overhead per unit
$3 per unit
Fixed overhead for the year
$680,000 per year
Sales price
$80 per unit
Variable selling and administrative cost per unit
$2 per unit
Fixed selling and administrative cost per year
$112,000 per year
1. Prepare an income statement for the year using absorption costing.
Product cost per unit using Absorption Costing:
Direct materials per unit
Direct labor per unit
Variable overhead per unit
Fixed overhead per unit ($680,000 / 20,000 units produced)
Cost per unit
$6.00
11.00
3.00
34.00
$54.00
Zbest Manufacturing
Absorption Costing Income Statement
Sales (14,000 units @ $80 per unit)
Cost of goods sold (14,000 units @ $54 per unit)
Gross margin
Selling, general and administrative expenses:
Variable selling and administrative expenses (14,000 x $2)
Fixed selling and administrative expenses
Total selling, general and administrative expenses
Net income (loss)
$1,120,000
756,000
364,000
$28,000
112,000
140,000
$224,000
P2
Copyright © 2016 McGraw-Hill Education
25
NEED-TO-KNOW
Zbest Manufacturing reports the following costing data for the current year. 20,000 units were produced,
and 14,000 units were sold.
Direct materials per unit
$6 per unit
Direct labor per unit
$11 per unit
Variable overhead per unit
$3 per unit
Fixed overhead for the year
$680,000 per year
Sales price
$80 per unit
Variable selling and administrative cost per unit
$2 per unit
Fixed selling and administrative cost per year
$112,000 per year
2. Prepare an income statement for the year using variable costing.
Product cost using Variable Costing:
Direct materials per unit
$6.00
Direct labor per unit
11.00
Variable overhead per unit
3.00
Cost per unit
$20.00
P2
Zbest Manufacturing
Variable Costing Income Statement
Sales (14,000 units @ $80 per unit)
Less: Variable costs
Variable production costs (14,000 x $20 per unit)
Variable selling and administrative expenses (14,000 x $2)
Total variable costs
Contribution margin
Less: Fixed expenses
Fixed overhead costs
Fixed selling and administrative expenses
Total fixed expenses
Net income (loss)
$1,120,000
$280,000
28,000
308,000
812,000
680,000
112,000
792,000
$20,000
26
NEED-TO-KNOW
Zbest Manufacturing
Absorption Costing Income Statement
Sales (14,000 units @ $80 per unit)
Cost of goods sold (14,000 units @ $54 per unit)
Gross margin
Selling, general and administrative expenses:
Variable selling and administrative expenses (14,000 x $2)
Fixed selling and administrative expenses
Total selling, general and administrative expenses
Net income (loss)
Zbest Manufacturing
Variable Costing Income Statement
Sales (14,000 units @ $80 per unit)
Less: Variable costs
Variable production costs (14,000 x $20 per unit)
Variable selling and administrative expenses (14,000 x $2)
Total variable costs
Contribution margin
Less: Fixed expenses
Fixed overhead costs
Fixed selling and administrative expenses
Total fixed expenses
Net income (loss)
P2
Number of units added to inventory
Fixed overhead per unit ($680,000 / 20,000 units)
Change in income (Absorption vs. Variable)
Copyright © 2016 McGraw-Hill Education
$1,120,000
756,000
364,000
28,000
112,000
140,000
$224,000
$1,120,000
$280,000
28,000
308,000
812,000
680,000
112,000
792,000
$20,000
6,000
$34.00
$204,000
27
6-P3: Convert income under
variable costing to the absorption
cost basis.
28
Converting Reports under Variable
Costing to Absorption Costing
Income under variable costing is restated to that under
absorption costing utilizing the following formula:
Exhibit 6.11 Converting Variable Costing Income to Absorption Costing Income
Income under
Absorption costing
=
Income under
variable costing
+
Fixed overhead cost
in ending inventory
▬
Fixed overhead cost in
beginning inventory
P3
29
Converting Reports under Variable
Costing to Absorption Costing
Exhibit 6.12 Converting Variable Costing Income to Absorption Costing Income
Variable costing income (from exhibit 19.10)
Add: Fixed overhead cost deferred in ending inventory (20,000 × $10)
Less: Fixed overhead cost recognized from beginning inventory (20,000 × $10)
Absorption costing income
2013
$580,000
0
0
$580,000
2014
$120,000
200,000
0
$320,000
2015
$1,040,000
0
-200,000
$840,000
To restate variable costing income to absorption costing income
for 2014, we must add back the fixed overhead cost deferred in
ending inventory.
P3
Similarly, to restate variable costing income to absorption costing income for 2015,
we must deduct the fixed overhead cost recognized from beginning inventory, which
was incurred in 2014, but expensed in the 2015 cost of goods sold when the
inventory was sold.
30
6-C1: Describe how absorption
costing can result in
overproduction.
31
Planning Production
C1
Producing too
much inventory
Producing too
little inventory
Excess
inventory
Lost sales
Higher storage
and financing
costs
Customer
dissatisfaction
Greater risk of
obsolescence
32
Planning Production: Income under
Absorption Costing for Different Production
Levels
Why is income under
absorption costing
affected by the
production level when
that for variable costing
is not?
C1
The answer lies in the different
treatment of fixed overhead
costs within the two methods.
So…under absorption costing, if
excess units are produced, the
fixed overhead cost allocated to
those units is not expensed
until a future period when those
units are sold.
Exactly!
33
Planning Production
What would happen if IceAge’s manager decided to produce 100,000
units instead of 60,000?
The 40,000 extra units would be stored in inventory
and the total production cost PER UNIT is $4 less!
Exhibit 6.13 Unit Cost Under Absorption Costing
When 60,000 Units are Produced
Direct materials cost
$4 per unit
Direct labor cost
8 per unit
Variable overhead
3 per unit
Total variable cost
15 per unit
Fixed overhead ($600,000/60,000 units)
10 per unit
Total production cost
$25 per unit
C1
When 100,000 Units are Produced
Direct materials
Direct labor
Variable overhead
Total variable cost
Fixed overhead ($600,000/100,000 units)
Total production cost
$4 per unit
8 per unit
3 per unit
15 per unit
6 per unit
$21 per unit
When 60,000 units are produced:
When 100,000 units are produced:
Fixed overhead per unit is:
Fixed overhead per unit is:
$600,000/ 60,000 units = $10/unit
$600,000/ 100,000 units = $6/unit
34
Planning Production: Income under Absorption
Costing for Different Production Levels
Exhibit 6.14
IceAge Company
Income Statement (Absorption Costing)
For Year Ended December 31, 2013
[60,000 Units Produced; 60,000 Units Sold]
Sales (60,000 x $40)
Cost of goods sold (60,000 x $25)
Gross margin
Selling and administrative expenses
Variable (60,000 x $2) $120,000
Fixed
200,000
Net income
$2,400,000
1,500,000
900,000
320,000
$580,000
Note: Income under absorption costing is
$240,000 greater if management produces
40,000 more units than necessary and builds
up ending inventory.
C1
IceAge Company
Income Statement (Absorption Costing)
For Year Ended December 31, 2013
[100,000 Units Produced; 60,000 Units Sold]
Sales (60,000 x $40)
Cost of goods sold (60,000 x $21)
Gross margin
Selling and administrative expenses
Variable (60,000 x $2) $120,000
Fixed
200,000
Net income
$2,400,000
1,260,000
1,140,000
320,000
$820,000
This shows that a manager can report
increased income merely by producing
more and disregarding whether the
excess units can be sold or not.
35
Planning Production: Income under Variable
Costing for Different Production Levels
Exhibit 6.15
[60,000 Units Produced; 60,000 Units Sold]
Sales (60,000 x $40)
Variable expenses
Variable production costs
(60,000 x $15)
$900,000
Variable selling and administrative
expenses (60,000 x $2)
120,000
Contribution margin
Fixed expenses
Fixed overhead
600,000
Fixed selling and
administrative expense
200,000
Net income
$2,400,000
1,020,000
1,380,000
800,000
$580,000
[100,000 Units Produced; 60,000 Units Sold]
Sales (60,000 x $40)
Variable expenses
Variable production costs
(60,000 x $15)
$900,000
Variable selling and administrative
expenses (60,000 x $2)
120,000
Contribution margin
Fixed expenses
Fixed overhead
600,000
Fixed selling and
administrative expense
200,000
Net income
$2,400,000
1,020,000
1,380,000
800,000
$580,000
Under variable costing, even if I produce more units, it
doesn’t effect the reported net income.
C1
I actually have to SELL more units to increase my net income.
36
6-P4: Determine product
selling price based on
absorption costing.
37
How does management determine
the sales price of a product?
Although many
factors impact
pricing, cost is a
crucial factor!
Absorption cost information is useful
because it reflects the full costs that
sales must exceed for the company to
be profitable.
Over the long
run, price must
be high enough
to cover all costs.
P4
38
We can use a three-step process to
determine product selling prices:
•
•
•
Step 1: Determine the product cost per
unit using absorption costing.
Step 2: Determine the target markup on
product cost per unit.
Step 3: Add the target markup to the
product cost to find the target selling
price
P4
39
Example: IceAge will use absorption
costing to determine a target selling price.
Exhibit 6.16 Determining Selling Price with Absorption Costing
Step 1
Absorption cost per unit (from Exhibit 6.3)
$25
Step 2
Target markup per unit ($25 times 60%)
15
Step 3
Target selling price per unit
$40
Start with product
cost.
In this example, they chose a markup of 60% of cost.
So the target selling price is $40 per unit.
Then, management needs to
determine a target markup.
P4
40
Controllable vs. Uncontrollable Costs?
•
Managers are responsible for their
controllable costs.
•
•
•
A cost is controllable if a manager has the
power to determine the amount incurred.
Examples vary depending on the manager’s
level in the company.
Uncontrollable costs are not within the
manager’s control or influence.
•
Example would be production capacity.
P4
41
Limitations of Reports Using Variable Costing
Realities that contribute to the widespread
use of absorption costing by companies:
•For income tax purposes, absorption costing is
the only acceptable basis for filings with the Internal
Revenue Service (IRS) under the Tax Reform Act of
1986.
•Absorption costing is the only acceptable basis
for external reporting under both U.S. GAAP and
IFRS.
•Top executives are often awarded bonuses based
on income computed using absorption costing.
P4
42
6-A1: Use variable costing
in pricing special orders.
43
Setting Prices
Over the Long Run:
• Price must be high enough to cover all
costs, including variable costs and
fixed costs, and still provide an
acceptable return to owners
A1
44
Setting Prices
Over the Short Run:
•
Fixed production costs such as the cost to maintain
plant capacity do not change with changes in
production levels.
•
With excess capacity, increases in production level
would increase variable production costs, but not
fixed costs.
•
While managers try to maintain the long-run price
on existing orders, which covers all production
costs, managers should accept special orders
provided the special order price exceeds variable
cost.
A1
45
Setting Prices
(Special Orders Illustration)
Should the company accept a special order for 1,000 pairs
of skates at an offer price of $22 per pair?
Exhibit 6.17 Computing Incremental Income for a Special Order
Rejecting Special Order
Accepting Special Order
Incremental sales
$ 0
Incremental sales (1,000 x $22)
Incremental costs
0
Incremental costs:
Incremental income
$ 0
Variable production cost (1,000 x $15)
Variable selling expense (1,000 x $2)
Incremental income
$22,000
5,000
2,000
$ 5,000
From Exhibit 6.3 Unit Cost Computation at 60,000 units
Absorption
Costing
Direct materials cost per unit……………...
$4
Direct labor cost per unit………….
8
Overhead cost
Variable overhead cost per unit…..
3
Fixed overhead cost per unit……...
10
A 1 product cost per unit…………….
Total
$25
Variable production cost = $15
($4DM + $8DL + $3 VOH)
Order should be accepted because the
$22 order price exceeds the $15
variable cost of the product.
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End of Chapter 6
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