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    Notes in SCM Chapter 3: Product Costing

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    1. Absorption costing and variable costing have similarities in treating all variable costs as inventoriable, but differ in their treatment of fixed manufacturing overhead. 2. Under absorption costing, product cost includes direct materials, direct labor, and allocated fixed overhead. Under variable costing, product cost only includes direct materials, direct labor, and variable overhead. 3. The key difference in income statement presentation between the two methods is that absorption costing includes fixed overhead in cost of goods sold, while variable costing treats fixed overhead as a period cost and includes it below operating income.

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    Notes in SCM Chapter 3: Product Costing

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    1. Absorption costing and variable costing have similarities in treating all variable costs as inventoriable, but differ in their treatment of fixed manufacturing overhead. 2. Under absorption costing, product cost includes direct materials, direct labor, and allocated fixed overhead. Under variable costing, product cost only includes direct materials, direct labor, and variable overhead. 3. The key difference in income statement presentation between the two methods is that absorption costing includes fixed overhead in cost of goods sold, while variable costing treats fixed overhead as a period cost and includes it below operating income.

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    NOTES IN SCM CHAPTER 3

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    1. Absorption costing and variable costing have similarities in treating all variable costs as inventoriable, but differ in their treatment of fixed manufacturing overhead. 2. Under absorption costing, product cost includes direct materials, direct labor, and allocated fixed overhead. Under variable costing, product cost only includes direct materials, direct labor, and variable overhead. 3. The key difference in income statement presentation between the two methods is that absorption costing includes fixed overhead in cost of goods sold, while variable costing treats fixed overhead as a period cost and includes it below operating income.

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    Notes in SCM Chapter 3: Product Costing

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    1. Absorption costing and variable costing have similarities in treating all variable costs as inventoriable, but differ in their treatment of fixed manufacturing overhead. 2. Under absorption costing, product cost includes direct materials, direct labor, and allocated fixed overhead. Under variable costing, product cost only includes direct materials, direct labor, and variable overhead. 3. The key difference in income statement presentation between the two methods is that absorption costing includes fixed overhead in cost of goods sold, while variable costing treats fixed overhead as a period cost and includes it below operating income.

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    NOTES IN SCM CHAPTER 3: PRODUCT COSTING

    Absorption and Variable Costing

    SIMILARITIES

     All variable costs are inventoriable

    DIFFERENCES

    1. Treatment of fixed manufacturing overhead (FOH)


    2. Income statement presentation of the different costs.

    Absorption – ginawa natin sa Cost Accounting;

    Product cost/inventoriable cost/manufacturing cost/ assignable cost= DM+DL+FOH

    Variable Costing

    Product cost/inventoriable cost/manufacturing cost/ assignable cost= DM+DL+ variable FOH

    Q: Saan napunta yung fixed overhead? -Opex

    EFFECTS OF CHANGING INVENTORY LEVELS

    ABSORPTION VARIABLE THROUGHPUT


    sales   
    Cost of sales (inventory) DM, DL, Variable FOH, DM, DL, Variable FOH DM
    Fixed FOH
    Higher inventory Lower inventory Lowest inventory
    Gross profit  Always greater than the Highest gross profit.
    gross profit of absorption
    costing
    Opex Variable Opex, fixed Variable Opex, Fixed Opex, Variable Opex, Fixed
    Opex Fixed FOH Opex, Fixed FOH, Variable
    FOH, Direct Labor
    Operating Income/ EBIT Production = sales A=V=T
    Production > sales A>V>T
    Production < sales A<V<T

    If production = sales or kung yung naproduce mo ay equal sa nabenta mo, therefore


    operating income (absorption costing) = operating income (variable costing)
    If production > sales or kung hindi lahat ng pinroduce ay nabenta, therefore
    operating income (absorption costing) > operating income (variable costing)
    If production < sales or kung mas marami kang nabenta kesa sa pinroduce (dahil sa beg inventory)
    operating income (absorption costing) < operating income (variable costing)

    Q: bakit hindi equal ang Operating Income nila? - kapag mas maraming sales, mas maraming
    nababawas kay absorption dahil nileless lang sa kanya kapag nabenta. Unlike sa variable costing na kung
    ano talaga yung naincur, yun yung ileless.
    PRODUCTION vs SALES INVENTORY
    P=S Unchanged
    P>S Increased
    P<S Decreased

    DIFFERENCES IN INCOME STATEMENT PRESENTATION

    ABSORPTION VARIABLE
    Sales Sales
    Less: COGS Less: Variable Manufacturing Cost
    GP Manufacturing Contribution Margin
    Less: Variable Non manufacturing Cost Less: Variable Non-manufacturing cost
    Fixed Non manufacturing Cost Contribution Margin
    Operating Income Less: Fixed Manufacturing Cost
    Operating Income

    BENEFITS OF ABSORPTION COSTING

    1. Provides matching of costs and benefits


    2. Consistent with GAAP and requirement for the reporting of income of Income Tax Returns.

    LIMITATION OF ABSORPTION COSTING

    1. When a greater (less) number of products are produced than are sold during a period, it causes
    inventory to increase (decrease).

    BENEFITS OF VARIABLE COSTING

    1. Impact on profits of changes in sales volume is more obvious


    2. By not including FOH in the calculation of costs to produce, companies are able to make better
    and more informed decisions about profitability and product mix.
    3. Operating income is directly related to sales levels and is not influenced by changes in inventory
    levels and is not influenced by changes in inventory levels due to production and sales variances.
    4. Variance analysis of FOH is less confusing (Actual vs Budgeted)

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