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Absorption and Variable Costing

The document discusses the differences between absorption costing and variable costing accounting methods. Absorption costing treats all manufacturing costs as product costs, while variable costing only includes variable costs as product costs. Fixed costs are reported as period costs under variable costing. The document also explains how net operating income under the two methods will differ depending on whether production levels are equal to, greater than, or less than sales levels. It provides an example to reconcile the two methods' operating income calculations.

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Felimar Cala
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84 views2 pages

Absorption and Variable Costing

The document discusses the differences between absorption costing and variable costing accounting methods. Absorption costing treats all manufacturing costs as product costs, while variable costing only includes variable costs as product costs. Fixed costs are reported as period costs under variable costing. The document also explains how net operating income under the two methods will differ depending on whether production levels are equal to, greater than, or less than sales levels. It provides an example to reconcile the two methods' operating income calculations.

Uploaded by

Felimar Cala
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Acc 112

Unit I: Absorption and Variable Costing

Absorption costing, also known as full costing, is a cost accumulation and reporting method that treats all
manufacturing costs (direct material, direct labor, variable overhead, and fixed overhead) as inventoriable or
product costs.

Variable costing, also known as direct costing or marginal costing, is a cost accumulation and reporting
method that includes only variable manufacturing costs (direct material, direct labor, and variable overhead)
as product costs

Absorption Costing VS Variable Costing


Product Costs Product Costs
Direct Materials Direct Materials
Direct Labor Direct Labor
Variable Factory Overhead Variable Factory Overhead
Fixed Overhead

Period Costs Period Costs


Selling Expenses Fixed Overhead
Administrative Expenses Selling Expenses
Administrative Expenses

Comparative Income Effects - Variable and Absorption Costing

Relation Between Relation Between


Production and Sales Variable and Absorption
Costing Net Operating Incomes
Units produced = Unit sales Absorption costing NI = Variable costing NI
(No change in inventory)
Units produced > Unit sales Absorption costing NI > Variable costing NI
(Inventory increases)
Units produced < Unit sales Absorption costing NI < Variable costing NI
(Inventory decreases)

Reconciliation of Operating Income under Variable and Absorption Costing

Fixed overhead in the beginning inventories XXX


Less: Fixed Overhead in the Ending Inventories (XXX)
Fixed Overhead deferred in (released from) inventory XXX

Variable costing net operating income XXX


Add (Deduct): Overhead Deferred in (Released from) XXX
Absorption costing Operating Income XXX
Acc 112
Problem:

Free Incorporated started operations on 2018 and is engaged in the production of Chemical A. Free annually
produces 100,000 units of Chemical A. Data at this level of production are as follows:
Direct Materials 20 per unit
Direct Labor 10 per unit
Variable Manufacturing Overhead 5 per unit
Fixed Manufacturing Overhead 150,000 annually
Fixed Selling and Administrative Expenses 60,000 annually
Variable Selling and Administrative Expenses 2 per unit

Chemical A is sold at 100 per unit and Sales for the past three years were: 100,000 units for 2018; 70,000
units for 2019 and 120,000 on 2020.

Determine the following:


1. Product cost per unit of Chemical A using Absorption Costing
2. Product costs per unit of Chemical A using Variable Costing
3. Operating income under Absorption Costing
4. Operating income under Variable Costing

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