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Copyright 2006, The McGraw-Hill Companies,
Inc.McGraw-Hill/Irwin
11thEditionChapter 7
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Copyright 2006, The McGraw-Hill Companies,
Inc.McGraw-Hill/Irwin
Variable Costing: A
Tool for Management
Chapter Seven
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Copyright 2006, The McGraw-Hill Companies,
Inc.McGraw-Hill/Irwin
Overview of Absorptionand Variable Costing
Direct Materials
Direct Labor
Variable Manufacturing Overhead
Fixed Manufacturing Overhead
Variable Selling and d!inistrative Expenses
Fixed Selling and d!inistrative Expenses
Variable
Costing
Absorption
Costing
ProductCosts
PeriodCosts
Product
Costs
Period
Costs
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Copyright 2006, The McGraw-Hill Companies,
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Quick Check
"hich !ethod #ill produce the highest values for
#or$ in process and finished goods inventories%
a& bsorption costing&
b& Variable costing&
c& 'he( produce the sa!e values for these
inventories&
d& )t depends& & &
"hich !ethod #ill produce the highest values for
#or$ in process and finished goods inventories%
a& bsorption costing&
b& Variable costing&
c& 'he( produce the sa!e values for these
inventories&
d& )t depends& & &
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Copyright 2006, The McGraw-Hill Companies,
Inc.McGraw-Hill/Irwin
"hich !ethod #ill produce the highest values for
#or$ in process and finished goods inventories%
a& bsorption costing&
b& Variable costing&
c& 'he( produce the sa!e values for these
inventories&
d& )t depends& & &
"hich !ethod #ill produce the highest values for
#or$ in process and finished goods inventories%
a& bsorption costing&
b& Variable costing&
c& 'he( produce the sa!e values for these
inventories&
d& )t depends& & &
Quick Check
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Copyright 2006, The McGraw-Hill Companies,
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Summar
!elation between "ffect !elation between
production on variable and
and sales iniventor absorption income
#nventor Absorption
$roduction % Sales increases %
Variable
#nventor Absorption
$roduction & Sales decreases &
VariableAbsorption
$roduction ' Sales (o change '
Variable
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7/9Copyright 2006, The McGraw-Hill Companies,
Inc.McGraw-Hill/Irwin
CV$ Analsis) *ecision Makingand Absorption costing
bsorption costing does not support CV*anal(sis because it
essentiall( treats fixed
!anufacturing overhead as a variable cost b(assigning a per unit
a!ount of the fixed
overhead to each unit of production&
'reating fixed !anufacturing overhead as avariable cost can+
, Lead to fault( pricing decisions and $eep-drop
decisions&
, *roduce positive net operating inco!e even #hen the nu!ber of
units sold is less than the
brea$even point&
'reating fixed !anufacturing overhead as avariable cost can+
, Lead to fault( pricing decisions and $eep-drop
decisions&
, *roduce positive net operating inco!e even #hen the nu!ber of
units sold is less than the
brea$even point&
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8/9Copyright 2006, The McGraw-Hill Companies,
Inc.McGraw-Hill/Irwin
Variable
Costing
Variable versus Absorption Costing
Absorption
Costing
Fixed !anufacturing
costs !ust be assigned
to products to properl(
!atch revenues and
costs&
Fixed !anufacturing
costs are capacit( costs
and #ill be incurred
even if nothing is
produced&
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Inc.McGraw-Hill/Irwin
"nd of Chapter +
