Chapter 6 in class notes, Lecture notes of Accounting

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Variable Costing and

Segment Reporting: Tools

for Management

CHAPTER 6

Three Simplifying Assumptions

1. This chapter uses actual costing rather than the

normal costing approach that was used in the job-

order costing chapters.

2. This chapter always uses the actual number of

units produced as the allocation base for assigning

actual fixed manufacturing overhead costs to

products.

3. This chapter always assumes that the variable

manufacturing costs per unit and the total fixed

manufacturing overhead cost per period remain

constant.

Quick Check 1

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…

Harvey Company produces a single product with the following information available:

Number of units produced annually 25,

Variable costs per unit:

Direct materials, direct labor,

and variable mfg. overhead $ 10

Selling & administrative expenses $ 3

Fixed costs per year:

Manufacturing overhead $150,

Selling & administrative expenses $100,

Unit Cost Computations – Part 1

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 and Absorption Costing Income Statements

Variable Costing Sales (20,000 × $30) $ 600, Less variable expenses: Variable cost of goods sold (20,000 × $ 10 ) (^) $ 200, Variable selling & administrative expenses (20,000 × $3) 60, Total variable expenses 260, Contribution margin 340, Less fixed expenses: Fixed manufacturing overhead $ 150, Fixed selling & administrative expenses 100,000 250, Net operating income $ 90, Variable manufacturi ng costs only. All FMOH is expensed immediately. Variable Costing Contribution Format Income Statement

• Comparing the Two Methods – Part

Variable costing net operating income $ 90, Add: Fixed mfg. overhead costs deferred in inventory (5,000 units × $6 per unit) 30, Absorption costing net operating income $ 120,

Fixed mfg. overhead $150,

Units produced 25,000 units

= $6 per

unit

We can reconcile the difference between absorption and variable income as follows: Comparing the Two Methods – Part 2

Unit Cost Computations Since the variable costs per unit, total fixed costs, and the number of units produced remained unchanged, the unit cost computations also remain unchanged. Absorption Costing Variable Costing Direct materials, direct labor, and variable mfg. overhead $ 10 $ 10 Fixed mfg. overhead ($150,000 ÷ 25,000 units) 6 - Unit product cost $ 16 $ 10

Variable Costing

Variable manufacturi ng costs only. All fixed manufacturing overhead is expensed. 510, 260,

Variable costing net operating income $ 260,

Deduct: Fixed manufacturing overhead

costs released from inventory

(5,000 units × $6 per unit) 30,

Absorption costing net operating income $ 230,

We can reconcile the difference between

absorption and variable income as follows:

Fixed mfg. overhead $150,

Units produced 25,000 units

= $6 per

unit

Reconciling the Difference – Part 1

Costing Method 1st Period 2nd Period Total Absorption $ 120,000 $ 230,000 $350, Variable 90,000 260,000 350, Reconciling the Difference – Part 2

Decentralization and Segment Reporting A segment is any part or activity of an organization about which a manager seeks cost, revenue, or profit data. An Individual Store A Sales Territory A Service Center

Keys to Segmented Income

Statements

There are two keys to building segmented

income statements:

A contribution format should be used

because it separates fixed from

variable costs and it enables the

calculation of a contribution margin.

Traceable fixed costs should be

separated from common fixed costs

to enable the calculation of a

segment margin.