Part4：Absorption_costing_versus_variable_costing.ppt

Part Four Absorption Costing versus Variable Costing Variable Versus Absorption Costing ABSORPTION COSTING VERSUS VARIABLE COSTING Full or Absorption Costing Assigns all variable and fixed manufacturing costs to the product Required for external reporting Variable Costing Assigns only variable manufacturing costs to the product Direct material, direct labor, variable manufacturing overhead Variable Versus Absorption Costing The differences between variable-costing and absorption-costing methods are based on the treatment of fixed manufacturing overhead. Variable Versus Absorption Costing Variable Versus Absorption Costing Comparative Income Statement for Variable-Costing Method Fixed-Overhead Rate Cost of Goods Sold forAbsorption-Costing Method Cost of Goods Sold forAbsorption-Costing Method Comparison of Variable andAbsorption Costing Reconciliation of Variable Costing and Absorption Costing Reconciliation of Variable Costing and Absorption Costing Under absorption costing, fixed overhead appears in the cost of goods sold and also in the production volume variance. Under variable costing, fixed overhead is a period cost. ABSORPTION COSTING VERSUS VARIABLE COSTINGCOMPARISON Primary Difference Under variable costing, fixed manufacturing overhead is an expense in the current period. ABSORPTION COSTING VERSUS VARIABLE COSTINGCOMPARISON - Continued Variable costing does not defer fixed manufacturing overhead to the future - i.e., they are not inventoried Net income under absorption costing compared to net income under variable costing: Higher when units produced exceed units sold Lower when units produced are less than units sold Equal when units produced and sold are the same: There is no ending inventory so fixed costs are not deferred into the future ABSORPTION COSTING VERSUS VARIABLE COSTING Example – Premium Products Manufactures Fix-it, a sealant for car windows Relevant data for the first month of production: ABSORPTION COSTING VERSUS VARIABLE C