MODUL PERKULIAHAN

Akuntansi
Manajemen
Variable costing & Absorption
costing

Fakultas Program Studi Tatap Muka Kode MK Disusun Oleh

06
Economic & Business Accountancy 84033 Alfiandri, MAcc

Abstract Kompetensi
Diisi dengan abstract
1. Understand Variable costing
2. Understand Absorption costing
Pembahasan
1. Introduction

Module 6 explains about two applications of contribution format income statement

namely variable costing and absorption costing. First approach is variable costing.
Variable costing is preferred by some managers of the firm for internal decision making
and must be used when an income statement is prepared in the contribution format.
Second approach is absorption costing. Absorption costing is used for external financial
report. These two different approaches will produce different results of net operating
income since between variable costing and absorption costing use different method and
recognition of the cost.

2. Overview Variable and Absorption Costing.

Beginning to understand variable and absorption costing, it should focus on the three
key concepts.

1. Both income statement format include product cost and period cost even though they
e.g., variable and absorption costing, defines and classify differently.

2. Variable costing income statement is grounded in the contribution format. They

categorize expenses based on cost behavior, which mean variable costs are
reported separately from fixed costs. Meanwhile, absorption costing ignores variable
and fixed cost distinction.

3. Variable and absorption costing net operating income figure often differ from one
another. The differences between them which always about income statement
account for fixed manufacturing overhead that recognize differently.

Variable costing

Under variable costing, manufacturing costs which vary are treated as product cost.
This includes direct material, direct labor the variable portion of manufacturing overhead.
Fixed manufacture overheads are not treated as product cost under this method, instead
treated as periodic cost. Such fixed manufacture overhead as, selling and administration

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 expenses. Consequently, the cost unit of products in inventory and cost of goods sold
(COGS) do not contain any fixed manufacture overhead cost.

Absorption cost

Absorption cost on the other hand, treats all manufacturing cost as product costs,
regardless variable or fixed cost. The cost of unit product under absorption cost consists
of direct material, direct labor and both variable and fixed manufacturing overhead. Thus,
absorption costing allocates a portion of fixed manufacturing overhead cost to each unit
of product, along with the variable manufacturing costs. Because absorption costing
includes all manufacturing costs in product costs, it is frequently referred to as the full
cost method

Selling and administrative Expenses

Basically, selling and administrative expenses are never treated as product costs.
This because that costs are not directly attach in making the products and therefore, the
managers obtain pure cost information of the products. However, under absorption and
variable costing, variable and fixed selling and administrative expenses are always
treated as period costs and are expensed as incurred.

Summary the differences between variable and absorption cost

The essential difference between variable costing and absorption costing is how
each method accounts for fixed manufacture overhead costs. The rest of the costs are
treated the same under both of that method.

In variable costing, fixed manufacturing overhead costs are considered to be period cost
like selling and administrative costs and threaten and recognize in the income statement
as period cost.

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 In absorption costing, fixed manufacturing overhead costs are included as part of the
costs of work in process inventories. When units are completed, these costs are
transferred to finished goods and when the unit of products sold, then the costs are
treated and flow through income statement and recognize in the cost of goods sold.

3. Variable costing and absorption costing – an example

Weber Light Aircraft, a company that produces light recreational aircraft, Data
concerning the company’s operations appear below:

As the table above shows selling price per aircraft, variable cost per aircraft and total
fixed expenses monthly never change. The only variable change are number of unit
produce (January = 1, February = 2 and March = 4) and number of unit sold (January =
1, February = 1 and March = 5).

Next, we will construct firstly the company’s variable costing income statement and next
will construct under absorption costing approach.

Variable Costing income statement

Under variable costing, product cost consists of direct material, direct labor and variable
manufacturing overhead. The total variable production cost is $ 25.000. See it below:

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 These total variable production i.e., $ 25.000 is threaten for each month per aircraft. Next
step is identifying cost of goods sold (COGS) which compute below:

And next is the calculation of period cost i.e., Selling and Administrative expenses :

If it put all together then variable costing income statement would appear as follow:

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In the variable costing income statement above shows, monthly fixed manufacturing
overhead has recorded as periodic cost.

A simple method for understanding how Weber Light Aircraft computed its variable
costing net operating income figures is to focus on the contribution margin per aircraft sold,
which is computed as follows

The variable costing net operating income for each period can always be computed
by multiplying the number of units sold by the contribution margin per unit and then
subtracting total fixed costs. For Weber Light Aircraft these computations would appear as
follows

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Absorption costing income statement

Under absorption costing method, all manufacturing costs include fixed manufacture
overhead cost are consider as product cost. The first step in preparing Weber’s absorption
costing income statement is to determine the company unit product cost monthly.

Figure above shows that, fixed manufacturing overhead costs of $ 70.000 is divided by
number of unit produced to determine the fixed manufacturing overhead cost per unit.

The sales amounts of three month are same with variable costing income statement.
January’s COGS consists of one unit product in the month multiple absorption costing unit
product cost in a month, so total January’s COGS is $95.000, February’s COGS is $60.000
and March’s COGS is $230.000 (1 produce in Feb x $60.000 + 4 produces in March x
$42.500)

Take note that, although sales exactly same between January and February and cost
structure is not change, but net operating income $35.000 higher in February than January.
This is because a unit aircraft produce in February is not sold on February until March. This
aircraft has $35.000 of fixed manufacturing overhead incurred on February but is not
recorded as cost of goods on February until the aircraft sell on March.

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Reconciliation of Variable costing with Absorption costing income

Based on the example calculation above, it finds that net operating incomes under
both approaches are not same. Take case of Weber light aircraft, the net operating income
are the same on January but differ on the other two months. This is because under
absorption costing, some fixed manufacturing overhead is capitalized in inventories e.g.,
included product cost, rather than currently expensed in the income statement.

For example, there are two aircraft were produced in February with each of product
carried $35.000 in fixed manufacturing overhead ($70.000 / 2 aircraft produced). Because
only 1 product sold in February, then $35.000 fixed manufacturing overhead recognized on
February’s absorption costing income statement and it is part of cost of goods sold. The rest
of $35.000 fixed manufacturing overhead is recognized in the Balance Sheet as part of
finished goods inventories.

Contrary with variable costing, all of $70.000 of fixed manufacturing overhead

appeared on the February income statement as periodic cost. Consequently, net operating
income on February under absorption costing is higher than variable costing.

This was reversed in March, while 4 units were produced but 5 units were sold.
Under absorption costing, $105.000 of fixed manufacturing overhead was included in cost of
goods sold (rest of $35.000 unit produced on February and Sold in March + $17.500 for
each four unit produced and sold in March). Under variable costing on the other hand,
$70.000 fixed manufacturing overhead was recognized as periodic expenses. Therefore, the
comparability between both approaches is the net operating income in March was $35,000
lower under absorption costing than under variable costing.

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Again note that the difference between variable costing net operating income and absorption
costing net operating income is entirely due to the amount of fixed manufacturing overhead
that is deferred in, or released from, inventories during the period under absorption costing.
Changes in inventories affect absorption costing net operating income—they do not affect
variable costing net operating income, providing that variable manufacturing costs per unit
are stable

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Daftar Pustaka

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