Variable cost and FAC

Variable Costing Income Statement Example
Sales Less Variable: Variable COGS Variable Selling Variable Admin. Contribution Margin Less Fixed: Fixed Mfg. Fixed Selling Fixed Admin Net Income $100,000 $20,000 10,000 5,000
Variable Costing Income Statement: Considerations-Production > Sales
1. Net income is higher under full costing than variable costing. 2. $3,528,000 vs. $3,288,000 = $240,000 3. The $240,000 difference is due to the 1,200 (6,000 – 4,800) additional units produced and unsold. 4. Fixed manufacturing $1,200,000 / 6,000 units x 1,200 units remaining = $240,000
Summary of Effects of Production on Net Income
If units produced = units sold, then no difference between full costing and variable costing net income. If units produced > units sold, then full costing net income is greater than variable costing net income. If units produced < units sold, then full costing net income is less than variable costing net income.
Variable Costing Income Statement
1. The format uses a contribution margin approach. 2. All costs, manufacturing, selling and administrative, are classified as either fixed or variable.
Variable Costing
1. Variable Costing includes: a. Direct material b. Direct labor c. Variable Manufacturing overhead 2. Variable Costing lends itself well to decision making and “what-if” analyses. 3. Not allowed for GAAP.
Clausen Tube: Production is Greater Than Sales
Facts: 6,000 units produced and 4,800 units sold Selling Price: $2,000 per unit Variable Manufacturing: Direct Materials: $600 per unit Direct Labor: $225 per unit Variable MFG: $75 per unit Fixed Manufacturing: $1,200,000 per year Selling Expense: $40 per unit variable plus $100,000 fixed. Administrative: $500,000 per year (fixed)
Impact of JIT on the Income Effects of Full Versus Variable Costing
1. JIT (Just-In-Time) inventory systems lead to low inventories. 2. Results in little difference between production and sales. 3. Variable versus absorption net income differences negligible.
Clausen Tube Income Statement: Full Costing
Sales $10,000,000 Less COGS 5,700,000 Gross Margin 4,300,000 Less Selling and Admin: Selling $300,000 Admin 500,000 800,000 Net Income $3,500,000
Variable Costing Income Statement: Considerations
1. When sales volume and production volume are exactly equal, net income is the same under either full or variable costing. 2. Contribution margin is easily calculated under variable costing: 2,000 – 940 = 1,060. 3. Contribution margin ratio is: 1,060 / 2,000 = 53%
Clausen Tube Income Statement: Full Costing-Production > Sales
Sales Less COGS Gross Margin Less Selling and Admin: Selling $292,200 Admin 500,000 Net Income $ 9,600,000 5,280,000 4,320,000
Clausen Tube Income Statement: Variable Costing
Sales $10,000,000 Less Variable: Variable COGS $4,500,000 Variable Selling and Admin 200,000 Contribution Margin 5,300,000 Less Fixed: Fixed Mfg. 1,200,000 Fixed Selling 100,000 Fixed Admin 500,000 1,800,000 Net Income $3,500,000
35,000 65,000
10,000 8,000 7,000
25,000 40,000
Full (Absorption) Costing Income Statement Example
Sales Less COGS Gross Margin Less Selling and Admin: Selling 18,000 Admin 12,000 Net Income $100,000 30,000 70,000
30,000 40,000
Effects of Production on Income for Full Versus Variable Costing: Clausen Tube
Facts: 5,000 units produced and sold Selling Price: $2,000 per unit Variable Manufacturing: Direct Materials: $600 per unit Direct Labor: $225 per unit Variable MFG: $75 per unit Fixed Manufacturing: $1,200,000 per year Selling Expense: $40 per unit variable plus $100,000 fixed. Administrative: $500,000 per year (fixed)
792,200 $3,528,000
Clausen Tube Income Statement: Variable Costing-Production > Sales
Sales $ 9,600,000 Less Variable: Variable COGS $4,320,000 Variable Selling and Admin 192,000 Contribution Margin 5,088,000 Less Fixed: Fixed Mfg. 1,200,000 Fixed Selling 100,000 Fixed Admin 500,000 1,800,000 Net Income $3,288,000
Differences Between Full (Absorption) and Variable Costing
1. Fixed manufacturing overhead (included in Full Costing). 2. Fixed manufacturing costs, like depreciation, are a period expense on the income statement under variable costing. 3. Fixed manufacturing costs, like depreciation, are inventoried until sold under full costing.
Managerial Accounting