1. MANAGERIALACCOUNTING
By: Vandana kingrani
Assigned by : Ma’am Nadia Anjum
Sukkur IBA University

2. Book
Managerial
Accounting

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:

11. UNIT PRODUCT COST

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.

14. INCOME STATEMENTS

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

21. Equation Format

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.

28. ABOUT
SUKKUR IBA UNIVERSITY
Kandhkot Campus

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

30. Admissions: