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Chapter 6 Lecture Notes

Variable Costing and Segment Reporting: Tools for Management

JUST ONE THING
- the only thing that is different is the cost classification of FMOH

FMOH

| |Absorption costing (full cost) | | |Variable costing | | | Sales |Product cost (COGS) | Sales |Product cost | |- COGS |DM |-Variable Expenses |DM | |Gross Profit |DL |Contribution Margin |DL | | |VMOH | |VMOH | |- Operating expenses |FMOH (product cost) |-Fixed expenses |period cost-- VS&A | |Net income | |Net income | | | |Period costs (op. exp.) | |Period costs (fixed) | | |VS&A | |FMOH | | |FS&A | |FS&A |

Why two different methods?

UNIT PRODUCT COST COMPUTATIONS (Per Unit Product “Inventory” Costs)

|Absorption costing Product Cost |Variable costing Product Cost | |DM |DM | |DL |DL | |VMOH |VMOH | |FMOH (Total FMOH/units Produced) | |

FMOH on a per unit basis
Absorption costing puts FMOH on a per unit basis. To determine FMOH per unit we divide Total Fixed Manufacturing Overhead by the number of units PRODUCED.

Selling and administrative costs ---are PERIOD COSTS for both Methods Fixed Selling and administrative costs
Variable Selling and administrative costs (Cost per unit sold x number of units sold)

|Absorption costing Period Cost |Variable costing Period Cost | |Variable Selling & Administrative (VS&A per unit x unit sold) |Variable Selling & Administrative (VS&A per unit x unit sold) | |Fixed Selling & Administrative cost |Fixed Selling & Administrative cost | | |Fixed manufacturing overhead cost |

Calculation of Gross Profit versus Contribution Margin
Sales – cost of good sold = Gross Profit
Sales – variable expenses = Contribution margin

|Absorption costing (Gross Profit) |Variable costing (Contribution Margin) | |Sales (units sold x price per unit) minus |Sales (units sold x price per unit) minus...
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