Harvey Company Example:
1. Unit Cost Computations Absorption Variable
Costing Costing
Direct materials, direct labor,
and variable mfg. overhead $ 10 $ 10
Fixed mfg. overhead
6
Unit product cost $ 16 $ 10
2. Variable and Absorption Costing Income Statements
Let’s assume the following additional information for Harvey Company.
20,000 units were sold during the year at a price of $30 each.
There is no beginning inventory.
Now, let’s compute net operating income using both absorption and variable costing.
Variable Costing
Sales $ 600,000
Less variable expenses:
Variable cost of goods sold $ 200,000
Variable selling & administrative
expenses 60,000
Total variable expenses 260,000
Contribution margin
Less fixed expenses:
Fixed manufacturing overhead $ 150,000
Fixed selling & administrative expenses 100,000 250,000
Net operating income $ 90,000
Absorption Costing
Sales $ 600,000
Cost of goods sold 320,000
Gross margin 280,000
Less selling & administrative expenses:
Variable S&A expense 60,000
Fixed S&A expense 100,000 160,000
Net operating income $ 120,000
3. Comparing the Two Methods Cost of Goods Ending Period
Sold Inventory Expense
Absorption costing
Variable mfg. expenses $ 200,000 $ 50,000
Fixed mfg. expenses 120,000 30,000
$ 320,000 $ 80,000
Variable costing
Variable mfg. expenses $ 200,000 $ 50,000
Fixed mfg. expenses
$ 200,000 $ 50,000
Fixed manufacturing overhead deferred in inventory? $ 30,000
= number of units in ending inventory x fixed manufacturing overhead per unit
Extended Comparisons of Income Data Harvey Company – Year Two
In Year 2 of the operation:
- 30,000 units were sold in year 2
- The selling price per unit, variable costs per unit, total fixed costs, and number of units produced remain unchanged
- 5,000 units are in beginning inventory
1. Unit Cost Computations - YEAR 2 Absorption Variable
Costing Costing
Direct materials, direct labor, $ 10 $ 10
and variable mfg. overhead
Fixed mfg. overhead
($150,000 ÷ 25,000 units) 6
Unit product cost $ 16 $ 10
Compare with cost computation in Year 1?
2. Variable and Absorption Costing Income Statements - YEAR 2
Variable Costing
Sales $ 900,000
Less variable expenses:
Variable cost of goods sold $ 300,000
Variable selling & administrative
expenses 90,000
Total variable expenses 390,000
Contribution margin 510,000
Less fixed expenses:
Fixed manufacturing overhead $ 150,000
Fixed selling & administrative expenses 100,000 250,000
Net operating income $ 260,000
Absorption Costing
Sales $ 900,000
Cost of goods sold 480,000
Gross margin 420,000
Less selling & administrative expenses:
Variable S&A expense $ 90,000
Fixed S&A expense 100,000 190,000
Net operating income $ 230,000
3. Comparing the Two Methods - YEAR 2
Cost of Goods Ending Period
Sold Inventory Expense
Absorption costing
Variable mfg. expenses $ 300,000
Fixed mfg. expenses 180,000
$ 480,000
Variable costing
Variable mfg. expenses $ 300,000
Fixed mfg. expenses 150,000
$ 300,000 $ 150,000
Fixed manufacturing overhead released from beginning inventory under absorption costing?
$ 30,000
= number of units in beginning inventory x fixed manufacturing overhead per unit
Compare Net income from 2 methods
Costing Method 1st Period 2nd Period Total
Absorption Net income $ 120,000 $ 230,000 $ 350,000
Variable Net income 90,000 260,000 350,000
Total
$ 250,000
$ 150,000
$ 400,000
Total
$ 300,000
$ 180,000
$ 480,000
$ 300,000
$ 150,000
$ 450,000
Weber Light Aircraft Example:
Company that produces light recreational aircraft. Data concerning the company’s operations appear below:
1. Unit Cost Computations Variable
Costing
Direct materials, direct labor, $ 25,000
and variable mfg. overhead
Fixed mfg. overhead 0
Unit product cost $ 25,000
Variable Costing Cost of Goods Sold
Jan Feb Mar
Unit product cost $ 25,000 $ 25,000 $ 25,000
Units sold 1 1 5
Variable cost of goods sold $ 25,000 $ 25,000 $ 125,000
Absorption Costing
Jan Feb Mar
Direct materials, direct labor, $ 25,000 $ 25,000 $ 25,000
and variable mfg. overhead
Fixed mfg. overhead 70,000 35,000 17,500
Unit product cost $ 95,000 $ 60,000 $ 42,500
Absorption Costing Cost of Goods Sold
Jan Feb Mar
Unit product cost $ 95,000 $ 60,000 $ 42,500
Unit produce 1 2 4
Units sold 1 1 5
Variable cost of goods sold $ 95,000 $ 60,000 $ 230,000
2. Variable and Absorption Costing Income Statements
Variable Costing Income Statement
Jan Feb Mar
Sales $ 100,000 $ 100,000 $ 500,000
Less variable expenses:
Variable cost of goods sold 25,000 25,000 125,000
Variable selling & administrative expenses 10,000 10,000 50,000
Total variable expenses 35,000 35,000 175,000
Contribution margin 65,000 65,000 325,000
Less fixed expenses:
Fixed manufacturing overhead 70,000 70,000 70,000
Fixed selling & administrative expenses 20,000 20,000 20,000
Total fixed expenses 90,000 90,000 90,000
Net operating income (loss) $ (25,000) $ (25,000) $ 235,000
Absorption Costing Income statement
Jan Feb Mar
Sales $ 100,000 $ 100,000 $ 500,000
Cost of goods sold 95,000 60,000 230,000
Gross margin 5,000 40,000 270,000
Less selling & administrative expenses:
Variable S&A expense 10,000 10,000 50,000
Fixed S&A expense 20,000 20,000 20,000
Net operating income (loss) $ (10,000) $ (10,000) $ 30,000
3. Variable and Absorption Costing Income Statements - Contribution margin per unit
Variable Costing - Contribution Margin per Aircraft Sold
Selling price per aircraft
Variable
Variable cost of and
selling goods sold per aircraft
administrative expense per
aircraft
Contribution margin per aircraft
Variable Costing Net Income - Contribution margin per unit
Jan Feb Mar
Number of aircraft sold
Contribution margin per aircraft
Total contribution margin
Total fixed expenses
Net operating income (loss)
4. Reconciliation of Variable Costing with Absorption Costing Income
Fixed Manufacturing Overhead Deferred in, or Released from,
Inventories under Absorption Costing
Fixed manufacturing overhead in Jan Feb Mar
ending inventories = number of units in beginning/endin
Deduct: Fixed manufacturing overhead in
beginning inventories
Fixed manufacturing overhead deferred in
(released from) inventories
Fixed Manufacturing Overhead Deferred in, or Released from,
Inventories under Absorption Costing
Jan Feb Mar
Add fixed manufacturing overhead
Variable
deferredcosting net operating
in (released incomeunder
from) inventory (loss)
absorption costing
Absorption costing net operating income (loss)
ear below:
number of units in beginning/ending inventory x fixed manufacturing overhead per unit
Chapter 6: Applying Excel
Data
Selling price per unit $50
Manufacturing costs:
Variable per unit produced:
Direct materials $11
Direct labor $6
Variable manufacturing overhead $3
Fixed manufacturing overhead per year $120,000
Selling and administrative expenses:
Variable per unit sold $4
Fixed per year $70,000
Year 1 Year 2
Units in beginning inventory 0
Units produced during the year 10,000 6,000
Units sold during the year 8,000 8,000
Enter a formula into each of the cells marked with a ? below
Review Problem 1: Contrasting Variable and Absorption Costing
Compute the Ending Inventory
Year 1 Year 2
Units in beginning inventory 0 ?
Units produced during the year ? ?
Units sold during the year ? ?
Units in ending inventory ? ?
Compute the Absorption Costing Unit Product Cost
Year 1 Year 2
Direct materials ? ?
Direct labor ? ?
Variable manufacturing overhead ? ?
Fixed manufacturing overhead ? ?
Absorption costing unit product cost ? ?
Construct the Absorption Costing Income Statement
Year 1 Year 2
Sales ? ?
Cost of goods sold ? ?
Gross margin ? ?
Selling and administrative expenses ? ?
Net operating income ? ?
Compute the Variable Costing Unit Product Cost
Year 1 Year 2
Direct materials ? ?
Direct labor ? ?
Variable manufacturing overhead ? ?
Variable costing unit product cost ? ?
Construct the Variable Costing Income Statement
Year 1 Year 2
Sales ? ?
Variable expenses:
Variable cost of goods sold ? ?
Variable selling and administrative expenses ? ? ? ?
Contribution margin ? ?
Fixed expenses:
Fixed manufacturing overhead ? ?
Fixed selling and administrative expenses ? ? ? ?
Net operating income ? ?
