# chapter 6.pptx

29 de May de 2023
1 de 31

### chapter 6.pptx

• 1. MANAGERIALACCOUNTING By: Vandana kingrani Assigned by : Ma’am Nadia Anjum Sukkur IBA University
• 3. CHAPTER 6 VARIABLE AND ABSORPTION COSTING
• 4. Agenda ■ Overview of Variable and absorption costing ○Variable costing ○Absorption costing ○Selling and administrative expenses ○ Summary of differences ■ Variable and absorption costing-An example ○ Variable costing contribution income statement ○ Absorption costing income statement ■ Reconciliation of Variable costing with Absorption Costing income ■ Advantages of Variable Costing and the contrbution approach
• 5. Overview of Variable and Absorption Costing
• 6. Variable Costing ■ Under variable costing only those manufacturing costs that vary with output are treated as product costs. ■ This would usually include direct materials, direct labor and the variable portion of manufacturing overhead. ■ Fixed manufacturing overhead is not treated as a product costs under this method
• 7. Absorption Costing ■ Absorption costing treats all manufacturing costs as product costs. Regardless of whether they are variable or fixed. ■ This would usually include direct materials, direct labor, and both variable and fixed manufacturing overhead ■ Fixed manufacturing overhead is treated as product cost.
• 8. Summary of differences • In absorption costing fixed MOH costs included in work in process when units are completed • In variable costing fixed MOH costs are considered to be period costs.
• 9. VARIABLE & ABSORPTION COSTING - EXAMPLE
• 10. Let's illustrate the difference between variable costing and absorption costing by considering Weber light aircraft a company’ data:
• 12. Variable Costing To prepare the company's variable costing income statements for January, February and march we begin by computing the unit product cost.
• 13. Absorption Costing Remember that Under absorption costing, Fixed MOH is included in product cost.
• 15. Variable –Cost of Goods Sold Because each month's unit product cost is \$25000 per aircraft, the variable costing cost of goods sold for all three months can be computed as follows:
• 16. Selling and Administrative Expenses The company's total selling and administrative expenses would be derived as follows:
• 17. Variable Costing- Contribution Format Putting it all together, the variable costing income statements would appear below
• 18. Absorption Costing – Traditional Format This aircraft has \$35,000 of fixed manufacturing overhead attached to it that was incurred in February, but will not be recorded as part of cost of goods sold until March.
• 19. RECONCILIATION OF VARIABLE COSTING WITH ABSORPTION COSTING INCOME
• 20. Step 1 Variable costing and absorption costing net operating income can be reconciled by determining how much fixed MOH was deferred in , or released from inventories during the period
• 22. Step 2 Again note that the difference between variable costing net operating income and absorption costing net operating income is entirely due to the amount of fixed manufacturing overhead.
• 24. ADVANTAGES OF VARIABLE COSTING AND THE CONTRBUTION APPROACH
• 25. Enabling CVPAnalysis ■ CVP analysis requires that we break costs down into their fixed andvariable components. ■ Because variable costing income statements categorize costs as fixed and variable, it is much easier to use this income statement format to perform CVP analysis than attempting to use the absorption costing format, which mixes together fixed and variable costs.
• 26. Changes in Net Operating Income ■ A manager might wonder why net operating income went up from January to February even though sales were exactly the same. Was it a result of lower selling costs, more efficient ? ■ In fact, it was simply because the number of units produced exceeded the number of units sold in February and so some of the fixed manufacturing overhead costs were deferred in inventories in that month. There is no way to tell this from the absorption costing income statements.
• 27. Supporting Decisions Making ■ The variable costing method correctly identifies the additional variable costs that will be incurred to make one more unit. It also emphasizes the impact of fixed costs on profits. ■ The total amount of fixed manufacturing costs appears explicitly on the income statement, highlighting that the whole amount of fixed manufacturing costs must be covered for the company to be truly profitable.
• 29. ■ Mission Sukkur IBA University – Kandhkot Campus has been established with a goal to offer access to quality education to the people of underprivileged areas of Pakistan. With its geographical importance in Kandhkot city, the campus provides easy access to the students hailing from south Punjab, northern Sindh, and south-east Balochistan