Title Page

Strategic Cost Management

Product Costing:
Absorption Costing
Variable Costing

Group 2
Title Page Reporters

Group Members

Group 2

Karyll Shenie Missy Marifel Jerick

Albarillo Bano Duncano Lisondra Ocon
Title Page Reporters Objectives

Upon completion of this report, you should be able to:

LEARNING OBJECTIVES
Differentiate Solve and analyze
absorption costing various problems about
against variable absorption costing and
costing; variable costing;

Prepare an income Reconcile the net

statement under income under
absorption costing and absorption costing and
variable costing; variable costing.
Title Page Reporters Objectives Introduction

Product Costing: Absorption and Variable

INCOME AND PERFORMANCE

EVALUATION

One of the tools for performance

evaluation is the assessment of the
entity’s financial performance -
income.
Title Page Reporters Objectives Introduction

Product Costing: Absorption and Variable

PRODUCT COSTING

The process of calculating and Methods:

Absorption Costing
assigning costs to a specific vs.
product or group of products Variable Costing
in order to determine their
total production cost.
Title Page Reporters Objectives Introduction

Product Costing: Absorption and Variable

IMPORTANCE IN COST
ACCOUNTING
Cost Control Compliance
Profitability Analysis Taxation
Budgeting and Resource Allocation
Forecasting Continuous
Decision-making Improvement
Performance Investor and Creditor
Evaluation Confidence
Inventory Valuation Benchmarking
Title Page Reporters Objectives Introduction AC & VC

Absorption Costing and Variable Costing

OV
V I
E E
RW
Title Page Reporters Objectives Introduction AC & VC

Absorption Costing and Variable Costing

ABSORPTION COSTING
Also known as full costing method.
All direct materials, direct labor,
variable manufacturing overhead,
and fixed manufacturing overhead
forms part of the cost of the product.
Variable and fixed selling and
administrative expenses forms part of
operating expenses.
Product costs are split into two:
Finished Goods when unsold
COGS upon selling
Title Page Reporters Objectives Introduction AC & VC

Absorption Costing and Variable Costing

ABSORPTION COSTING
Title Page Reporters Objectives Introduction AC & VC

Absorption Costing and Variable Costing

DIRECT COSTING

Suppose the total cost of raw materials used for manufacturing one
bicycle is P50. If the company manufactures 100 bicycles, what is the
total direct cost of raw materials?

The total direct cost of raw materials for bicycles would be:
100 x 50 = 5,000
Title Page Reporters Objectives Introduction AC & VC

Absorption Costing and Variable Costing

INDIRECT COSTING

The company leases a manufacturing facility where it produces

bicycles, tricycles, and skateboard. The monthly rent for this
facility is P10,000.

This cost cannot be directly attributed to any one product

because it supports the production of all these items.
Title Page Reporters Objectives Introduction AC & VC

Absorption Costing and Variable Costing

APPLICATION & PURPOSE

When to use Absorption Costing:

For external Reporting
Long-term Decision-making
Title Page Reporters Objectives Introduction AC & VC

Absorption Costing and Variable Costing

ADVANTAGES & DISADVANTAGES

Compliance with GAAP Potential for Overhead

Accurate Profit Determination Overabsorption or Underabsoption
Matching Costs and Revenue Complex Overhead Allocation
Inventory Valuation Periodic Fluctuations and Profits
Budgeting and Cost Control Inventory Holding Cost
May Encourage Overproduction
Stable Profit Margins
Incompatibility with ABC
Product Pricing
Performance Evaluation
Capitalization of Fixed Cost
Useful for External Stakeholders
Title Page Reporters Objectives Introduction AC & VC

Absorption Costing and Variable Costing

VARIABLE COSTING
Also known as contribution margin
approach.
Direct materials, direct labor, and
all variable cost are deducted to
sales to determine contribution
margin.
All fixed costs during the period are
deducted against the contribution
margin to determine net income.
 Title Page Reporters Objectives Introduction AC & VC

Absorption Costing and Variable Costing

FEATURES OF VARIABLE COSTING

Costs are identified as variable cost and Fixed overhead costs must not become
fixed cost. product cost.

Fixed manufacturing overhead is treated The main difference between absorption costing and
variable costing method is the treatment of fixed
as a period cost.
manufacturing overhead.
In absorption costing method, fixed manufacturing
Recognizes that only production costs that overhead is part of product cost.
vary directly with the volume of In variable costing method, all fixed manufacturing
overhead is charged and matched against sales,
production shall be “treated” as product therefore, all fixed manufacturing overhead is
cost. deducted to sales.
Title Page Reporters Objectives Introduction AC & VC

Absorption Costing and Variable Costing

APPLICATION & PURPOSE

When to use Variable Costing:

Short-term Decision-making
Internal Management and Cost Control
Title Page Reporters Objectives Introduction AC & VC

Absorption Costing and Variable Costing

ADVANTAGES & DISADVANTAGES

Simplified Costing Excludes Fixed Costs
Clear Profit Analysis Not GAAP Compliant
Facilitates Contribution Margin Analysis Inaccurate Inventory Valuation
Effective for Short-term Decision- Encourage Overproduction
Making Ineffective for Long-term Decision-
Reduces Fluctuations in Reported Profits Making
Useful for Evaluating Cost Control Difficulty in Cost Allocation
Better for Evaluating CVP Relationships
Doesn’t Reflect Full Cost Picture
Matches Cost with Revenue
Limited for External Reporting
Enhances Focus on Variable Cost
May not reflect Economic Reality
Reduction
Less Suitable for Pricing Decision
Compliments ABC
Title Page Reporters Objectives Introduction AC & VC IS (AC & VC)

Income Statement under Absorption Costing and Variable Costing

INCOME STATEMENT
PRESENTATION
Title Page Reporters Objectives Introduction AC & VC IS (AC & VC)

Income Statement under Absorption Costing

Title Page Reporters Objectives Introduction AC & VC IS (AC & VC)

Income Statement under Variable Costing

 Title Page Reporters Objectives Introduction AC & VC IS (AC & VC)

Problem Solving : Income Statement under Absorption Costing and Variable Costing

Hilomon Co. makes laptop tables that sells for P250 each. The
company’s annual production and sales level is 120,000 laptop tables.
In addition to P4,305,000 fixed manufacturing overhead and
P1,590,500 fixed administrative expenses, the following per-unit costs
have been determined for each laptop table:

Direct Materials P 60.00

Direct Labor 30.00
Variable Manufacturing Overhead 8.00
Variable Selling Expenses 22.00
Total Variable Cost per Unit P 120.00

Prepare the entity’s GAAP Income Statement and internal contribution

margin income statement. Ignore tax effects.
 Title Page Reporters Objectives Introduction AC & VC IS (AC & VC)

Problem Solving : Income Statement under Absorption Costing

Hilomon Co. makes laptop tables that sells for

P250 each. The company’s annual production
and sales level is 120,000 laptop tables. In
addition to P4,305,000 fixed manufacturing
overhead and P1,590,500 fixed administrative
expenses, the following per-unit costs have
been determined for each laptop table:

Direct Materials P 60.00

Direct Labor 30.00
Variable Manufacturing Overhead 8.00
Variable Selling Expenses 22.00
Total Variable Cost per Unit P 120.00
 Title Page Reporters Objectives Introduction AC & VC IS (AC & VC)

Problem Solving: Income Statement under Variable Costing

Hilomon Co. makes laptop tables that sells for

P250 each. The company’s annual production
and sales level is 120,000 laptop tables. In
addition to P4,305,000 fixed manufacturing
overhead and P1,590,500 fixed administrative
expenses, the following per-unit costs have
been determined for each laptop table:

Direct Materials P 60.00

Direct Labor 30.00
Variable Manufacturing Overhead 8.00
Variable Selling Expenses 22.00
Total Variable Cost per Unit P 120.00
 Title Page Reporters Objectives Introduction AC & VC IS (AC & VC)

Income Statement under Absorption Costing and Variable Costing

DIFFERENCE IN NET INCOME UNDER AC & VC

CASE 1
PRODUCTION EQUALS SALES
(If P = S, N/I , AC = N/I , VC)

Fixed overhead expense under

absorption costing equals
fixed overhead expense under
variable costing. Therefore,
absorption costing equals
variable costing.
 Title Page Reporters Objectives Introduction AC & VC IS (AC & VC)

Income Statement under Absorption Costing and Variable Costing

DIFFERENCE IN NET INCOME UNDER AC & VC

PRODUCTION IS GREATER THAN SALES

CASE 2
(If P > S, N/I , AC > N/I , VC)

Fixed overhead expense

under absorption costing is
less than fixed overhead
expense under variable
costing. Therefore, absorption
income is greater than
variable costing income.
 Title Page Reporters Objectives Introduction AC & VC IS (AC & VC)

Income Statement under Absorption Costing and Variable Costing

DIFFERENCE IN NET INCOME UNDER AC & VC

PRODUCTION IS GREATER THAN SALES

CASE 2
(If P > S, N/I , AC > N/I , VC)

Fixed overhead expense

under absorption costing is
less than fixed overhead
expense under variable
costing. Therefore, absorption
income is greater than
variable costing income.
 Title Page Reporters Objectives Introduction AC & VC IS (AC & VC)

Income Statement under Absorption Costing and Variable Costing

DIFFERENCE IN NET INCOME UNDER AC & VC

PRODUCTION IS LESS THAN SALES

CASE 3
(If P < S, N/I , AC < N/I , VC)

Fixed overhead expense

under absorption costing is
greater than fixed overhead
expense under variable
costing. Therefore, absorption
income is less than than
variable costing income.
 Title Page Reporters Objectives Introduction AC & VC IS (AC & VC)

Income Statement under Absorption Costing and Variable Costing

DIFFERENCE IN NET INCOME UNDER AC & VC

PRODUCTION IS LESS THAN SALES

CASE 3
(If P < S, N/I , AC < N/I , VC)

Fixed overhead expense

under absorption costing is
greater than fixed overhead
expense under variable
costing. Therefore, absorption
income is less than than
variable costing income.
Title Page Reporters Objectives Introduction AC & VC IS (AC & VC)

Income Statement under Absorption Costing and Variable Costing

INVENTORY METHOD - SHORTCUT

CASE 3
Title Page Reporters Objectives Introduction AC & VC IS (AC & VC)

Income Statement under Absorption Costing and Variable Costing

INVENTORY METHOD - SHORTCUT

<-- CASE 1 -->

<-- CASE 2 -->

 Title Page Reporters Objectives Introduction AC & VC IS (AC & VC) Reconciliation

Reconciliation of Net Income under Absorption Costing and Variable Costing

RECONCILIATION OF NET INCOME

Absorption Costing Net Income (ACNI) Variable Costing Net Income (VCNI)

Fixed Overhead Expense in the Fixed Overhead Expense in the

Beginning Inventory Beginning Inventory

Fixed Overhead Expense in the Fixed Overhead Expense in the

Ending Inventory Ending Inventory

Variable Costing Net Income (VCNI) Absorption Costing Net Income (ACNI)
 Title Page Reporters Objectives Introduction AC & VC IS (AC & VC) Reconciliation

Reconciliation of Net Income under Absorption Costing and Variable Costing

PRACTICE PROBLEM

C
A
S
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3
 Title Page Reporters Objectives Introduction AC & VC IS (AC & VC) Reconciliation

Reconciliation of Net Income under Absorption Costing and Variable Costing

PRACTICE PROBLEM

C
A
S
E
1

C
A
S
E
2
Title Page Reporters Objectives Introduction AC & VC IS (AC & VC) Reconciliation Last Page

Production Costing: Absorption and Variable

Thank you!!!