Kế toán, kiểm toán - Chapter 7: Variable costing: A tool for management

Variable Costing:A Tool for ManagementChapter 7Learning Objective 1Explain how variable costing differs from absorption costing and compute unit product costs under each method.Overview of Absorption and Variable CostingDirect MaterialsDirect LaborVariable Manufacturing OverheadFixed Manufacturing OverheadVariable Selling and Administrative ExpensesFixed Selling and Administrative ExpensesVariableCostingAbsorptionCostingProductCostsPeriodCostsProductCostsPeriodCostsQuick Check  Which method will produce the highest values for work in process and finished goods inventories? a. Absorption costing.b. Variable costing.c. They produce the same values for these inventories.d. It depends. . . Which method will produce the highest values for work in process and finished goods inventories? a. Absorption costing.b. Variable costing.c. They produce the same values for these inventories.d. It depends. . .Quick Check Harvey Company produces a single productwith the following information available:Unit Cost ComputationsUnit product cost is determined as follows:Under absorption costing, all production costs, variable and fixed, are included when determining unit product cost. Under variable costing, only the variable production costs are included in product costs. Unit Cost ComputationsLearning Objective 2Prepare income statements using both variable and absorption costing.Income Comparison ofAbsorption and Variable Costing Let’s assume the following additional information for Harvey Company.20,000 units were sold during the year at a priceof $30 each.There is no beginning inventory. Now, let’s compute net operatingincome using both absorptionand variable costing.Absorption CostingFixed manufacturing overhead deferred in inventory is 5,000 units × $6 = $30,000.Variablemanufacturing costs only.All fixedmanufacturingoverhead isexpensed.Variable CostingLearning Objective 3Reconcile variable costing and absorption costing net operating incomes and explain why the two amounts differ.Comparing the Two MethodsFixed mfg. overhead $150,000 Units produced 25,000 units= = $6 per unitWe can reconcile the difference betweenabsorption and variable income as follows:Comparing the Two MethodsExtended Comparisons of Income Data Harvey Company – Year TwoUnit Cost ComputationsSince the variable costs per unit, total fixed costs, and the number of units produced remained unchanged, the unit cost computations also remain unchanged.Absorption CostingFixed manufacturing overhead released from inventory is 5,000 units × $6 = $30,000.Unit product cost.Variable CostingAll fixedmanufacturingoverhead isexpensed.Variablemanufacturing costs only.We can reconcile the difference betweenabsorption and variable income as follows:Fixed mfg. overhead $150,000 Units produced 25,000 units= = $6 per unitComparing the Two MethodsComparing the Two MethodsSummary of Key InsightsLearning Objective 4Understand the advantages and disadvantages of both variable and absorption costing.Impact on the ManagerOpponents of absorption costing argue thatshifting fixed manufacturing overhead costsbetween periods can lead to faulty decisions.These opponents argue that variable costing incomestatements are easier to understand because net operatingincome is only affected by changes in unit sales. Thisproduces net operating income figures that areconsistent with managers’ expectations.CVP Analysis, Decision Makingand Absorption costing Absorption costing does not dovetail with CVP analysis, nor does it support decision making. It treats fixed manufacturing overhead as a variable cost. It assigns per unit fixed manufacturing overhead costs to production. Treating fixed manufacturing overhead as a variable cost can: Lead to faulty pricing decisions and faulty keep-or-drop decisions.Assigning per unit fixed manufacturing overhead costs to production can: Potentially produce positive net operating income even when the number of units sold is less than the breakeven point.External Reporting and Income TaxesTo conform toGAAP requirements,absorption costing must be used forexternal financial reports in the United States.Under the TaxReform Act of 1986,absorption costing must beused when filling out income tax returns.Since top executivesare typically evaluated based on earnings reported to shareholdersin external reports, they may feel that decisions should be based on absorption costing data.Advantages of Variable Costingand the Contribution ApproachAdvantagesManagement findsit more useful.Consistent withCVP analysis.Net operating income is closer tonet cash flow.Profit is not affected bychanges in inventories.Consistent with standardcosts and flexible budgeting.Impact of fixedcosts on profitsemphasized.Easier to estimate profitabilityof products and segments.VariableCostingVariable versus Absorption CostingFixed manufacturingcosts must be assignedto products to properlymatch revenues andcosts.Fixed manufacturing costs are capacity costsand will be incurredeven if nothing isproduced.Variable Costing and the Theory of Constraints (TOC) Companies involved in TOC use a form of variable costing. However, one difference of the TOC approach is that it treats direct labor as a fixed cost for three reasons: Many companies have a commitment to guarantee workers a minimum number of paid hours. Direct labor is usually not the constraint. TOC emphasizes the role direct laborers play in driving continuous improvement. Since layoffs often devastate morale, managers involved in TOC are extremely reluctant to lay off employees. Impact of Lean ProductionWhen companies use Lean Production . . .Productiontends to equalsales . . .So, the difference between variable andabsorption income tends to disappear.End of Chapter 7