Chapter 6 - Variable costing and segment reporting: tools for management. After studying Chapter 6, you should be able to: Explain how variable costing differs from absorption costing and compute unit product costs under each method, prepare income statements using both variable and absorption costing, reconcile variable costing and absorption costing net operating incomes and explain why the two amounts | Chapter 6 Variable Costing and Segment Reporting: Tools for Management Overview of Variable and Absorption Costing Direct Materials Direct Labor Variable Manufacturing Overhead Fixed Manufacturing Overhead Variable Selling and Administrative Expenses Fixed Selling and Administrative Expenses Variable Costing Absorption Costing Product Costs Period Costs Product Costs Period Costs Harvey Company produces a single product with the following information available: Unit Cost Computations Unit 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 Computations 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 . | Chapter 6 Variable Costing and Segment Reporting: Tools for Management Overview of Variable and Absorption Costing Direct Materials Direct Labor Variable Manufacturing Overhead Fixed Manufacturing Overhead Variable Selling and Administrative Expenses Fixed Selling and Administrative Expenses Variable Costing Absorption Costing Product Costs Period Costs Product Costs Period Costs Harvey Company produces a single product with the following information available: Unit Cost Computations Unit 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 Computations 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 manufacturing costs only. All fixed manufacturing overhead is expensed. Variable Costing Contribution Format Income Statement Absorption Costing Income Statement Fixed manufacturing overhead deferred in inventory is 5,000 units × $6 = $30,000. Unit product cost. Extended Comparisons of Income Data Harvey Company – Year Two Variable Costing Contribution Format Income Statement Variable manufacturing costs only. All fixed manufacturing overhead is expensed. Absorption Costing Income Statement Fixed manufacturing overhead released from inventory is 5,000 units × $6 = $30,000. Unit product cost. Summary of Key Insights Explaining Changes in Net Operating Income Variable costing income is only affected by changes in unit sales. It is not affected by the number of units produced. As a general rule, when sales go up, net operating income goes up, and vice versa. Absorption costing income is influenced by changes in
