WEEK 6
VARIABLE ABSORPTION COSTING
VCand AC are live differentmethods ofassigning manufacturing costs toproducts
Theydifferin how fixedmanufacturing overhead FMOH is treated
Absorption Costing Fullcosting
Required
for externalfinancialreporting GAAP
Includes all manufacturing costs inproductcost
directmaterials
direct labour
variablemanufacturingoverhead
fixedmanufacturing overhead FMOH
GFMOHis attached to
inventory affects COGSonly when units are sold
Variable Costing Contribution approach
Includes onlyvariablemanufacturing costs in product costs
DM DL VarMOH
FMOH is a periodexpense
Usedforinternal decision making CVPanalysis segmentreporting
Product cost treatment
Absorption CostingProduct Cost
directmaterial a directlabour manufacturingoverhead
UnitsProduced
proVfctionincreases pefh.eectasefinedMOH
If Fi unit costdecreases
fixedmanufacturing overhead
Variable Costing Product Cost
onlyvariable cost
fff cost DM DL VarMOH
fixedMOH is expensed in fulleachperiod
, Income statementstructures
Absorption CostingFormat Traditional Variable CostingFormat Contribution
Ilargen
sales sales
Variableexpenses
COGS includesFMOH allocated
perunit
Grossmargin Contribution
Margin 2 8ᵗʰ
SellingEeadmin Fixedexpenses includesentireFMOH
Net operatingincome Netoperatingincome
Impact on Net Operating Income NOI
Keyrule
Thedifference arises ONLY because absorptioncostingstoresFMOH in inventory
When Production Sales
Inventoryincreases
Same FMOH is defferred in inventory
Absorption NOI Variable NOI
When Production Sales
Inventorydecreases
Previously defferredFMOHreleased to COGS
Absorption NOI Variable NOI
When Production Sales
No change in inventory
Absorption NOI Variable NOI
VARIABLE ABSORPTION COSTING
VCand AC are live differentmethods ofassigning manufacturing costs toproducts
Theydifferin how fixedmanufacturing overhead FMOH is treated
Absorption Costing Fullcosting
Required
for externalfinancialreporting GAAP
Includes all manufacturing costs inproductcost
directmaterials
direct labour
variablemanufacturingoverhead
fixedmanufacturing overhead FMOH
GFMOHis attached to
inventory affects COGSonly when units are sold
Variable Costing Contribution approach
Includes onlyvariablemanufacturing costs in product costs
DM DL VarMOH
FMOH is a periodexpense
Usedforinternal decision making CVPanalysis segmentreporting
Product cost treatment
Absorption CostingProduct Cost
directmaterial a directlabour manufacturingoverhead
UnitsProduced
proVfctionincreases pefh.eectasefinedMOH
If Fi unit costdecreases
fixedmanufacturing overhead
Variable Costing Product Cost
onlyvariable cost
fff cost DM DL VarMOH
fixedMOH is expensed in fulleachperiod
, Income statementstructures
Absorption CostingFormat Traditional Variable CostingFormat Contribution
Ilargen
sales sales
Variableexpenses
COGS includesFMOH allocated
perunit
Grossmargin Contribution
Margin 2 8ᵗʰ
SellingEeadmin Fixedexpenses includesentireFMOH
Net operatingincome Netoperatingincome
Impact on Net Operating Income NOI
Keyrule
Thedifference arises ONLY because absorptioncostingstoresFMOH in inventory
When Production Sales
Inventoryincreases
Same FMOH is defferred in inventory
Absorption NOI Variable NOI
When Production Sales
Inventorydecreases
Previously defferredFMOHreleased to COGS
Absorption NOI Variable NOI
When Production Sales
No change in inventory
Absorption NOI Variable NOI
