Financial and Managerial Accounting, 8th Edition
19-1
CHAPTER 19
VARIABLE COSTING AND ANALYSIS
Related Assignment Materials
Student Learning Objectives
Discussion
Questions
Quick Studies*
Exercises*
Problems*
AA and
BTN
Conceptual objectives:
Analytical objectives:
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19-15
C1. Describe how absorption
2, 3, 4, 5, 8
19-16
19-12
19-3
BTN 19-1
Procedural objectives:
P1. Compute unit cost under both
absorption and variable costing.
12
19-1, 19-2, 19-19,
19-20
19-1, 19-2,
19-9
16
P3. Convert income under variable
10, 11
19-11, 19-12, 19-
19-10
19-1, 19-2,
AA 19-3, BTN 19-2,
P2. Prepare and analyze an income
3, 12
19-3, 19-4, 19-5,
19-3, 19-4, 19-
19-1, 19-2,
AA 19-1, AA 19-2,
*See additional information on next page that pertains to these quick studies, exercises and problems.
SP refers to the Serial Problem
AA refers to Accounting Analysis
Guided Example included
Financial and Managerial Accounting, 8th Edition
Additional Information on Related Assignment Material
See Chapter 1 of the Instructor’s Resource Manual for more information on materials for this text available in
Connect.
Connect
Available on the instructor’s course-specific website, Connect:
• All numerical Quick Studies, all Exercises and Problems Set A.
Hints/Guided Examples
Please note that the Guided Examples are labeled as “Hints” in Connect assignments. The animated PowerPoints without
Need-to-Know Videos
LO
Need–to-Know
Title
Time
P1
19-1
Computing Product Cost per Unit
Costing
P4
19-3
Setting Prices
Concept Overview Videos
LO
Title
Time
C1
Financial and Managerial Accounting, 8th Edition
19-3
Synopsis of Chapter Revision
NEW opener—Riffraff and entrepreneurial assignment.
Revised discussion of variable and absorption costing.
Revised discussion of income implications of variable and absorption costing.
New graphics on relations between production, sales, and income effects.
Financial and Managerial Accounting, 8th Edition
19-4
Chapter Outline
I. Introducing Variable Costing and Absorption Costing—absorption costing, or full costing, products
include direct materials, direct labor, and both variable and fixed overhead. This method is required for
external financial reporting under GAAP, but can result in misleading product cost information and poor
D. Computing Unit Product Cost
1. Product cost per unit under absorption costing consists of direct labor, direct materials, variable
overhead, and fixed overhead.
II. Income Reporting Implications
A. Units Produced Equal Units Sold
1. The income statement under variable costing is a contribution margin income statement.
B. Units Produced Exceed Units Sold
1. When units produced exceeds units sold, there is a difference in total expenses.
C. Units Produced are Less Than Units Sold
1. Beginning inventory under absorption costing is higher than under variable costing.
D. Summarizing Income Reporting
1. Differences in income are due to timing with which fixed overhead costs are reported in income
under the two methods.
Financial and Managerial Accounting, 8th Edition
19-5
E. Converting Income Under Variable Costing to Absorption Costing
1. An income statement using the variable costing method is restated to that under absorption
III. Comparing Variable Costing and Absorption Costing
A. Planning Production
1. Many companies link manager bonuses to income computed under absorption costing since this
is how income is reported to shareholders per GAAP, which can lead such managers to produce
excess inventory.
2. Inventory build-up leads to increased costs in storage, financing, and obsolescence. If excess
B. Setting Prices
1. Cost information is a crucial factor in setting prices.
C. Controlling Costs
1. An effective management control practice is to hold managers responsible only for their
controllable costs.
2. Uncontrollable costs are not within the manager’s influence.
D. CVP Analysis—If the income statement is prepared under variable costing and presented in the
Financial and Managerial Accounting, 8th Edition
19-6
E. Variable Costing for Service Firms—variable costing also applies to service companies. Service
companies do not have inventory but a focus on variable costs is still useful for managerial decisions.
V. Decision Analysis—Pricing Special Orders
A. Over the long run, prices must cover all fixed and variable costs.
Financial and Managerial Accounting, 8th Edition
19-7
Chapter 19 Alternative Demo Problem
Major Company began operations on January 1, 2019. Cost and sales information for its first
two calendar years are summarized below:
Manufacturing costs:
Direct materials $50 per unit
Direct labor $25 per unit
Factory overhead costs for the year:
Required:
1. Prepare an income statement for the company for 2019 under absorption costing.
2. Prepare an income statement for the company for 2019 under variable costing.
3. Prepare an income statement for the company for 2020 under absorption costing.
Financial and Managerial Accounting, 8th Edition
19-8
Chapter 19 Solution: Alternative Demo Problem
Compute unit costs for 2019 under the two costing methods as follows:
Absorption Costing
Variable Costing
Direct materials per unit
$50
$50
Direct labor per unit
25
25
Overhead per unit
unit
10
unit
1. Absorption costing income statement for 2019:
Major Corporation
Income Statement
For Year Ended December 31, 2019
Sales (80,000 × $500)
$40,000,000
Cost of goods sold (80,000 × $95)
7,600,000
Gross margin
32,400,000
Net income
$26,600,000
Financial and Managerial Accounting, 8th Edition
19-9
Chapter 19 Solution: Alternative Demo Problem Continued
2. Variable costing income statement for 2019:
Major Corporation
Income Statement (Contribution Format)
For Year Ended December 31, 2019
Sales (80,000 × $500)
$40,000,000
Variable expenses
Gross margin
32,400,000
Fixed expenses
Net income
$26,400,000
Compute unit costs for 2020 under the two costing methods as follows:
Absorption Costing
Variable Costing
Direct materials per unit
$50
$50
Direct labor per unit
25
25
Overhead per unit
10
10
17
Total production cost per unit
$101.67
$85
Financial and Managerial Accounting, 8th Edition
Chapter 19 Solution: Alternative Demo Problem Continued
3. Absorption costing income statement for 2020:
Major Corporation
Income Statement
For Year Ended December 31, 2020
Sales (80,000 × $500)
$40,000,000
Cost of goods sold
Gross margin
31,999,800
5,000,000
Net income
4. Variable costing income statement for 2020:
Major Corporation
Income Statement (Contribution Format)
For Year Ended December 31, 2020
Sales (80,000 × $500)
$40,000,000
Variable expenses
Gross margin
32,400,000
Fixed expenses
Net income
$26,400,000
5. Conversion of variable costing income to absorption costing income:
2019
2020
Variable costing income
$26,400,000
$26,400,000
ending inventory (20,000 × $10)
from beginning inventory (20,000 × $10)
Absorption costing income