,Click to edit Master title style,Click to edit Master text styles,Second level,Third level,2006 McGraw-Hill Ryerson Ltd.,Variable vs.Absorption Costing:A Tool for Management,Chapter Seven,Variable vs.Absorption Costin,Learning Objectives,1.,Explain,how variable costing differs from absorption costing and compute unit product costs under each method.,2.,Prepare,income statements using both variable and absorption costing.,3.,Reconcile,variable costing and absorption costing operating incomes,and explain why the two amounts differ.,After studying this chapter,you should be able to:,Learning Objectives1.Explain,Learning Objectives,4.,Explain,the advantages and disadvantages of both variable and absorption costing.,5.,Explain,how the use of JIT reduces the difference in reported operating income under the variable and absorption costing methods.,After studying this chapter,you should be able to:,Learning Objectives4.Explain,Overview of Absorptionand Variable Costing,Direct Materials,Direct Labour,Variable Manufacturing Overhead,Fixed Manufacturing Overhead,Variable Selling and Administrative Expenses,Fixed Selling and Administrative Expenses,VariableCosting,AbsorptionCosting,ProductCosts,PeriodCosts,ProductCosts,PeriodCosts,Overview of Absorptionand Var,Quick Check,Which method will produce the highest values for work in process and finished goods inventories?,a.Absorption costing.,b.Variable costing.,c.They produce the same values for these inventories.,d.It depends.,Quick Check Which method wi,Which method will produce the highest values for work in process and finished goods inventories?,a.Absorption costing.,b.Variable costing.,c.They produce the same values for these inventories.,d.It depends.,Quick Check,Which method will produce th,Harvey Company produces a single productwith the following information available:,Unit Cost Computations,Harvey Company produces a sing,Unit,product cost,is determined as follows:,Selling and administrative expenses arealways treated as,period expenses,and deducted from revenue as incurred.,Unit Cost Computations,Unit product cost is determine,Income Comparison ofAbsorption and Variable Costing,Lets assume the following additional information for Harvey Company.,20,000 units were sold during the year at a price of$30 each.,There were no units in beginning inventory.,Now,lets compute net operatingincome using both absorptionand variable costing.,Income Comparison ofAbsorptio,Absorption Costing,Absorption Costing,Variablemanufacturing costs only.,All fixedmanufacturingoverhead isexpensed.,Variable Costing,Variablemanufacturing costs,Income Comparison ofAbsorption and Variable Costing,Lets compare the methods.,Income Comparison ofAbsorptio,Reconciliation,Fixed mfg.Overhead$150,000,Units produced 25,000 units,=$6.00 per unit,We can reconcile the difference betweenabsorption and variable income as follows:,ReconciliationFixed mfg.Overh,Extended Comparison of Income Data Harvey Company Year Two,Extended Comparison of Income,Unit Cost Computations,Since there was no change in the variable costsper unit,total fixed costs,or the number ofunits produced,the unit costs remain unchanged.,Unit Cost ComputationsSince th,Absorption Costing,These are the 25,000 units,produced in the current period.,Absorption CostingThese are th,Variable Costing,All fixedmanufacturingoverhead isexpensed.,Variablemanufacturing costs only.,Variable CostingAll fixedmanu,Reconciliation,We can reconcile the difference betweenabsorption and variable income as follows:,Fixed mfg.Overhead$150,000,Units produced 25,000 units,=$6.00 per unit,ReconciliationWe can reconcile,Income Comparison,Income Comparison,Summary,Summary,Effect of Changes in Productionon Net Operating Income,Lets revise the Harvey Company example.,In the previous example,25,000 units were produced each year,but sales increased from 20,000 units in yearone to 30,000 units in year two.,In this revised example,production will differ each year whilesales will remain constant.,Effect of Changes in Productio,Effect of Changes in ProductionHarvey Company Year One,Effect of Changes in Productio,Unit,product cost,is determined as follows:,Unit Cost Computations for Year One,Since the number of units produced increasedin this example,while the fixed manufacturing overheadremained the same,the absorption unit cost is less.,Unit product cost is determine,Absorption Costing:Year One,Absorption Costing:Year One,Variable Costing:Year One,Variablemanufacturing costs only.,All fixedmanufacturingoverhead isexpensed.,Variable Costing:Year OneVar,Effect of Changes in ProductionHarvey Company Year Two,Effect of Changes in Productio,Unit,product cost,is determined as follows:,Unit Cost Computations for Year Two,Since the number of units produced decreased in thesecond year,while the fixed manufacturing overheadremained the same,the absorption unit cost is now higher.,Unit product cost is determine,Absorption Costing:Year Two,These are the 20,000 units produced in the cur