Absorption,Variable and

Throughput Costing
Presented by:
MACACULOP, Aileen B.
RAYOS, Kelvin E.
Learning Objectives
 Explain how Variable Costing differs from Absorption
Costing and Throughput Costing
 Compute the unit product cost under each method
 Prepare income statements using variable and
absorption costing, and reconcile the two income
figures
 Describe how fixed overhead costs are deferred in,
and released from, inventory under absorption
costing
Inventory Costing Choices: Overview
 Absorption costing—product costs are
capitalized; period costs are expensed.
 Variable costing—variable product and
period costs are capitalized; fixed product
and period costs are expensed.
 Throughput costing—only direct materials
are capitalized; all other costs are
expensed.
Inventory Costing: Overview

Variable Absorption
Costing Costing
Direct Materials
Product Direct Labor
Costs Product
Variable Manufacturing Overhead Costs
Fixed Manufacturing Overhead
Period Variable Selling and Administrative Expenses
Costs Period
Fixed Selling and Administrative Expenses Costs
Absorption Costing
 Absorption costing (also called Full Costing)
assigns all manufacturing costs to the product.
 Direct materials, direct labor, variable overhead, and
fixed overhead define the cost of a product.
 Under this method, fixed overhead is assigned to
the product through the use of a predetermined
fixed overhead rate and is not expensed until the
product is sold.
 Fixed overhead is an inventoriable cost.
Variable Costing
 Variable
costing stresses the difference
between fixed and variable manufacturing
costs.
 Variable costing assigns only variable
manufacturing costs to the product; these
costs include direct materials, direct labor,
and variable overhead.
Variable Costing (cont.)

 Fixedoverhead is treated as a period

expense and is excluded from the product
cost.
 Under variable costing, fixed overhead of
a period is seen as expiring that period
and is charged in total against the
revenues of the period.
Comparison of Variable and
Absorption Costing Methods
 Generally accepted accounting principles
(GAAP) require absorption costing for external
reporting.
 The Financial Accounting Standards Board
(FASB), the Internal Revenue Service (IRS), and
other regulatory bodies do not accept variable
costing as a product-costing method for
external reporting.
 Computation of Unit Cost
Harvey Company produces a single product with the
following information available:
Number of Units Produced Annually 25,000
VARIABLE COST
Direct Materials, Direct Labor, and Variable Mfg. ₱ 10.00
Overhead
Selling & Administrative Expenses 3.00
FIXED COST PER YEAR
Manufacturing 150,000.00
Overhead
Selling and Administrative Expenses 100,000.00
Unit product cost is determined as follows:
Absorption Variable
Costing Costing
Direct Materials, Direct Labor ₱ 10.00 ₱ 10.00
and Variable Mfg. Overhead
Fixed Mfg. Overhead 6.00 -
(₱150,000.00/25,000 Units)
Unit Product Cost ₱ 16.00 ₱ 10.00

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.
Variable and Absorption Costing
Income Statements
Let’s assume the following additional information
for Harvey Company.
20,000 units were sold during the year at a
price of ₱30.00 each.
There is no beginning inventory.
Now, let’s compute net operating
income using both absorption
and variable costing.
Variable Costing Contribution Format Income
Statement
VARIABLE COSTING
Sales (20,000 x ₱30.00) ₱ 600,000.00
Less Variable Expenses:
Variable Cost of Goods Sold ₱ 200,000.00
(20,000 x ₱10.00)
Variable Selling and Administrative 60,000.00
Expenses (20,000 x ₱3.00)
Total Variable Expenses 260,000.00
Contribution Margin 340,000.00
Less Fixed Expenses:
Fixed Manufacturing Overhead 150,000.00
Fixed Selling and Administrative 100,000.00 250,000.00
Expenses
NET OPERATING INCOME ₱ 90,000.00
Absorption Costing Income Statement
Absorption
Sales (20,000 x ₱30.00) ₱600,000.00
Less Cost of Goods Sold: (20,000 x ₱16.00)
320,000.00
Gross Margin
280,000.00
Less Selling & Administrative Expenses
Variable (20,000 x ₱3.00) ₱60,000.00
Fixed 100,000.00 160,000.00
Net Operating Income ₱120,000.00

Fixed manufacturing overhead deferred in inventory is 5,000

units × ₱6.00 = ₱30,000.00
Reconcile Variable Costing and Absorption Costing net
operating incomes

Cost of Ending Period Total

Goods Sold Inventory Expense
Absorption Costing
Variable Mfg. Costs ₱ 200,000.00 ₱ 50,000.00 ₱ - ₱ 250,000.00
Fixed Mfg. Costs 120,000.00 30,000.00 - 150,000.00
₱ 320,000.00 ₱ 80,000.00 ₱ - ₱ 400,000.00

Variable Costing
Variable Mfg. Costs ₱ 200,000.00 ₱ 50,000.00 ₱ - ₱ 250,000.00

Fixed Mfg. Costs - - 150,000.00 150,000.00

₱ 200,000.00 ₱ 50,000.00 ₱ 150,000.00 ₱ 400,000.00
Reconcile Variable Costing and Absorption
Costing net operating incomes

Variable Costing Net Operating Income ₱ 90,000.00

Add: Fixed Mfg. Overhead Costs deferred in Invty.

30,000.00
(5,000 units x ₱6.00 per unit)

Absorption Costing Net Operating Income ₱ 120,000.00

Fixed mfg. overhead ₱150,000.00

= = ₱6.00 per unit
Units produced 25,000 units
Extended Comparisons of Income Data
Harvey Company – Year Two
Number of units produced 25,000
Number of units sold 30,000
Units in Beginning Inventory 5,000
Unit sales price ₱30.00
Variable Costs per unit:
Direct Materials, Direct Labor, and Variable Mfg. OH ₱10.00
Selling & Administrative Expenses ₱3.00
Fixed Costs per year:
Manufacturing Overhead ₱150,000.00
Selling & Administrative Expenses ₱100,000.00
Unit Cost Computations

Absorption Variable
Costing Costing
Direct Materials, Direct Labor ₱ 10.00 ₱ 10.00
and Variable Mfg. Overhead
Fixed Mfg. Overhead 6.00 -
(₱150,000.00/25,000 Units)
Unit Product Cost ₱ 16.00 ₱ 10.00
Variable Costing Contribution Format
Income Statement
VARIABLE COSTING
Sales (30,000 x ₱30.00) ₱ 900,000.00
Less Variable Expenses:
Variable Cost of Goods Sold ₱ 300,000.00
(30,000 x ₱10.00)
Variable Selling and Administrative 90,000.00
Expenses (30,000 x ₱3.00)
Total Variable Expenses 390,000.00
Contribution Margin 510,000.00
Less Fixed Expenses:
Fixed Manufacturing Overhead 150,000.00
Fixed Selling and Administrative 100,000.00 250,000.00
Expenses
NET OPERATING INCOME ₱ 260,000.00
Absorption Costing Income Statement
Absorption
Sales (30,000.00 x ₱30.00) ₱900,000.00
Less Cost of Goods Sold
480,000.00
(30,000.00 x ₱16.00)
Gross Margin 420,000.00
Less Selling & Administrative Expenses
Variable (30,000 x ₱3.00) ₱90,000.00
Fixed 100,000.00 190,000.00
Net Operating Income ₱230,000.00

Fixed manufacturing overhead released from inventory is

5,000 units × ₱6.00 = ₱30,000.00
We can reconcile the difference between
absorption and variable income as follows:
Reconciliation
Variable Costing Net Operating Income ₱ 260,000.00
Deduct: Fixed Mfg. Overhead Costs released
30,000.00
from Inventory ( 5,000 units x ₱6.00 per unit)
Absorption Costing Net Operating Income ₱ 230,000.00

Fixed Mfg. Overhead ₱150,000.00

= = ₱6.00 per unit
Units produced 25,000 units
Alternative Reconciliation
Year 1 Absorption Variable Difference
Ending Inventory ₱80,000.00 ₱50,000.00 ₱30,000.00
Beginning Inventory - - -
Change in Inventory ₱80,000.00 ₱50,000.00 ₱30,000.00

Year 2 Absorption Variable Difference

Ending Inventory ₱ - ₱ - ₱ -
Beginning Inventory 80,000.00 50,000.00 30,000.00
Change in Inventory (₱80,000.00) (₱50,000.00) (₱30,000.00)
Comparing the Two Methods

Costing
1st Period 2nd Period Total
Method
Absorption ₱120,000.00 ₱230,000.00 ₱350,000.00
Variable 90,000.00 260,000.00 350,000.00
ABSORPTION vs VARIABLE COSTING
Summary of Income Effects
Thank You!