{"id":93,"date":"2021-01-26T22:03:51","date_gmt":"2021-01-26T22:03:51","guid":{"rendered":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/?post_type=chapter&#038;p=93"},"modified":"2021-06-10T19:10:05","modified_gmt":"2021-06-10T19:10:05","slug":"variable-v-absorption-costing","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/chapter\/variable-v-absorption-costing\/","title":{"raw":"Variable v. Absorption Costing","rendered":"Variable v. Absorption Costing"},"content":{"raw":"<div class=\"textbox learning-objectives\">\r\n<h3>Learning Outcomes<\/h3>\r\n<ul>\r\n \t<li>Compare and contrast operating income using variable costing and full absorption costing<\/li>\r\n<\/ul>\r\n<\/div>\r\n<img class=\"alignleft wp-image-1571\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5469\/2021\/01\/12225446\/ashley-byrd-KVby0S0GaH4-unsplash-1-200x300.jpg\" alt=\"Books on display\" width=\"150\" height=\"225\" \/>If more units are manufactured than are sold, there will be more units in ending inventory than there were in beginning inventory, and so some of the costs \u201cabsorbed\u201d by the manufacturing process will be trapped in ending inventory. Let\u2019s assume the company sold 2,900 units but manufactured 3,400, leaving 500 in ending inventory.\r\n\r\nSales will remain the same: 2,900 books sold at $10.00 each = $29,000. We\u2019ll also assume that raw materials inventory and work-in-process inventory beginning inventory was equal to ending inventory in order to eliminate those early layers of the process that absorb costs and therefore affect ending inventory costs.\r\n<div align=\"left\">\r\n<table class=\"fin-table acctstatement fw\"><caption>BlankBooks, Inc.\r\nIncome Statement\r\nFor the month ending July 31, 20XX<\/caption>\r\n<thead>\r\n<tr class=\"u-sr-only\">\r\n<th scope=\"col\">Financial Categories<\/th>\r\n<th scope=\"col\">Raw Materials Costs<\/th>\r\n<th scope=\"col\">Work-in-Progress Costs<\/th>\r\n<th scope=\"col\">Finished Goods\/Overhead Costs<\/th>\r\n<th scope=\"col\">Financial Totals<\/th>\r\n<\/tr>\r\n<\/thead>\r\n<tbody>\r\n<tr>\r\n<td>Sales<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td class=\"r\">$\u00a0\u00a029,000.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td colspan=\"5\"><span class=\"u-sr-only\">Subcategory, <\/span><strong>Cost of Goods Sold<\/strong><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Beginning raw materials<\/td>\r\n<td class=\"r\">$600.00<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Raw materials purchased<\/td>\r\n<td class=\"r\">20,270.00<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Ending raw materials<\/td>\r\n<td class=\"r\">(470.00)<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Raw materials transferred to WIP<\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span><\/td>\r\n<td class=\"r\">$\u00a0 20,400.00<\/td>\r\n<td>(VC)<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Beginning WIP<\/td>\r\n<td><\/td>\r\n<td class=\"r\">-<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Direct Labor<\/td>\r\n<td><\/td>\r\n<td class=\"r\">6,800.00<\/td>\r\n<td>(VC)<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Manufacturing overhead<\/td>\r\n<td><\/td>\r\n<td class=\"r\">1,200.00<\/td>\r\n<td>(FC)<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Ending WIP<\/td>\r\n<td><\/td>\r\n<td class=\"r\">-<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0WIP transferred to finished goods<\/td>\r\n<td><\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span><\/td>\r\n<td class=\"r\">$ \u00a0 28,400.00<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Beginning finished goods<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td class=\"r\">-<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Goods available for sale<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>28,400.00<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Ending finished goods<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td class=\"r\">(4,175.00)<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Cost of Goods Sold<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td class=\"r\">$\u00a0\u00a024,225.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Gross Profit<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>4,775.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td colspan=\"5\"><span class=\"u-sr-only\">Subcategory, <\/span><strong>Selling, general, and administrative costs<\/strong><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Sales Salaries<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td class=\"r\">$\u00a0 \u00a0 2,000.00<\/td>\r\n<td>(FC)<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Commissions<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td class=\"r\">870.00<\/td>\r\n<td>(VC)<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Internet expenses<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td class=\"r\">200.00<\/td>\r\n<td>(FC)<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Total selling, general, and administrative costs<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span><\/td>\r\n<td class=\"r\">3,070.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Operating income<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>1,705.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Provision for income taxes<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td class=\"r\">21%<\/td>\r\n<td class=\"r\">358.05<\/td>\r\n<\/tr>\r\n<tr>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0 1,346.95<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<\/tr>\r\n<tr>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Per unit cost, full absorption<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td class=\"r line-double\">$ \u00a0 \u00a0\u00a0 8.35<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<\/tr>\r\n<tr>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\n&nbsp;\r\n\r\nIn this case, we produced 500 units that were not sold, so two things happened:\r\n<ol>\r\n \t<li style=\"font-weight: 400;\" aria-level=\"1\">The unit cost of the items manufactured went down a bit, because the fixed product costs were allocated over more units.<\/li>\r\n \t<li style=\"font-weight: 400;\" aria-level=\"1\">500 units remained in ending inventory, capturing some of the overall costs on the company\u2019s balance sheet. Those costs will be shown as an expense during the period in which those books are sold (presumably in August).<\/li>\r\n<\/ol>\r\nWe could perform a CVP analysis based on 3,400 units instead of 2,900, but the bottom line still won\u2019t be the same as the full absorption statement because our CVP analysis assumes production and sales are the same:\r\n<div align=\"left\">\r\n<table class=\"fin-table acctstatement fw\"><caption>BlankBooks, Inc.\r\nCVP Analysis at 3,400 Units\r\nFor the month ending July 31, 20XX<\/caption>\r\n<tbody>\r\n<tr>\r\n<th class=\"r\" scope=\"col\"><\/th>\r\n<th class=\"r\" scope=\"col\">Units<\/th>\r\n<th class=\"r\" scope=\"col\">$\/Unit<\/th>\r\n<th class=\"r\" scope=\"col\">Total<\/th>\r\n<\/tr>\r\n<\/tbody>\r\n<tbody>\r\n<tr>\r\n<td>Sales<\/td>\r\n<td class=\"r\">3,400<\/td>\r\n<td class=\"r\">$\u00a0\u00a0\u00a0\u00a0\u00a010.00<\/td>\r\n<td class=\"r\">$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a034,000.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Variable costs<\/td>\r\n<td class=\"r\">3,400<\/td>\r\n<td class=\"r\">$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a08.30<\/td>\r\n<td class=\"r\">28,220.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Contribution Margin<\/td>\r\n<td><\/td>\r\n<td class=\"r\">$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a01.70<\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>5,780.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Fixed costs<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td class=\"r\">\u00a0\u00a0\u00a0\u00a0\u00a0\u00a03,400.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Operating income<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a02,380.00<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<\/tr>\r\n<tr>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>CM ratio<\/td>\r\n<td><\/td>\r\n<td class=\"r\">17.00%<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\n&nbsp;\r\n\r\nThe point of this analysis is to illustrate that under absorption costing, operating income changes based on increases or decreases in inventory due to producing more or fewer units than were sold in a period, and managers need to be aware of this. Each type of statement has its place:\r\n\r\nFinancial accounting requires full absorption accounting\r\n\r\nManagerial accounting often uses the contribution margin approach\r\n\r\nRemember that financial accounting is after-the-fact, reporting historical results for outside users, and managerial accounting is used by internal decision-makers to plan, direct, and control operations, so the two kinds of costing methods are driven by the needs of the users.\r\n\r\nA final difference between the two kinds of costing methods is with income statements. This module\u2019s introduction discussed those income statement distinctions, but let\u2019s review those differences one more time:\r\n<div align=\"left\">\r\n<table class=\"fin-table gridded\" style=\"height: 84px;\">\r\n<tbody>\r\n<tr style=\"height: 12px;\">\r\n<td style=\"font-weight: bold; height: 12px; width: 264.5px;\">Managerial Accounting<\/td>\r\n<td style=\"font-weight: bold; height: 12px; width: 276.5px;\">Financial Accounting<\/td>\r\n<\/tr>\r\n<tr style=\"height: 12px;\">\r\n<td style=\"font-weight: bold; font-style: italic; height: 12px; width: 264.5px;\">variable costing<\/td>\r\n<td style=\"font-weight: bold; font-style: italic; height: 12px; width: 276.5px;\">full absorption costing<\/td>\r\n<\/tr>\r\n<tr style=\"height: 12px;\">\r\n<td style=\"height: 12px; width: 264.5px;\">Sales<\/td>\r\n<td style=\"height: 12px; width: 276.5px;\">Sales<\/td>\r\n<\/tr>\r\n<tr style=\"height: 12px;\">\r\n<td style=\"height: 12px; width: 264.5px;\">Less: Variable product costs and variable SGA<\/td>\r\n<td style=\"height: 12px; width: 276.5px;\">Less: Cost of Goods sold that include fixed MOH<\/td>\r\n<\/tr>\r\n<tr style=\"height: 12px;\">\r\n<td style=\"height: 12px; width: 264.5px;\">= Contribution margin<\/td>\r\n<td style=\"height: 12px; width: 276.5px;\">= Gross Profit<\/td>\r\n<\/tr>\r\n<tr style=\"height: 12px;\">\r\n<td style=\"height: 12px; width: 264.5px;\">Less: Fixed MOH and Fixed SGA<\/td>\r\n<td style=\"height: 12px; width: 276.5px;\">Less: SGA<\/td>\r\n<\/tr>\r\n<tr style=\"height: 12px;\">\r\n<td style=\"height: 12px; width: 264.5px;\">= Operating Income<\/td>\r\n<td style=\"height: 12px; width: 276.5px;\">= Operating Income<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\n&nbsp;\r\n\r\nTo bring this all together, here is a comprehensive comparison of the two systems:\r\n\r\n<iframe src=\"\/\/plugin.3playmedia.com\/show?mf=6352537&amp;p3sdk_version=1.10.1&amp;p=20361&amp;pt=375&amp;video_id=ApRSgmnnEjI&amp;video_target=tpm-plugin-b1hfonz3-ApRSgmnnEjI\" width=\"800px\" height=\"450px\" frameborder=\"0\" marginwidth=\"0px\" marginheight=\"0px\"><\/iframe>\r\n\r\nYou can view the <a href=\"https:\/\/oerfiles.s3.us-west-2.amazonaws.com\/Managerial+Accounting\/Transcripts\/AbsorptionCostingvsVariableCosting_transcript.txt\" target=\"_blank\" rel=\"noopener\">transcript for \"Absorption Costing vs. Variable Costing\" here (opens in new window)<\/a>.\r\n\r\nNow check your understanding of the effect of full absorption costing on the bottom line.\r\n<div class=\"textbox tryit\">\r\n<h3>Practice Question<\/h3>\r\n[ohm_question hide_question_numbers=1]217770[\/ohm_question]\r\n\r\n<\/div>","rendered":"<div class=\"textbox learning-objectives\">\n<h3>Learning Outcomes<\/h3>\n<ul>\n<li>Compare and contrast operating income using variable costing and full absorption costing<\/li>\n<\/ul>\n<\/div>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignleft wp-image-1571\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5469\/2021\/01\/12225446\/ashley-byrd-KVby0S0GaH4-unsplash-1-200x300.jpg\" alt=\"Books on display\" width=\"150\" height=\"225\" \/>If more units are manufactured than are sold, there will be more units in ending inventory than there were in beginning inventory, and so some of the costs \u201cabsorbed\u201d by the manufacturing process will be trapped in ending inventory. Let\u2019s assume the company sold 2,900 units but manufactured 3,400, leaving 500 in ending inventory.<\/p>\n<p>Sales will remain the same: 2,900 books sold at $10.00 each = $29,000. We\u2019ll also assume that raw materials inventory and work-in-process inventory beginning inventory was equal to ending inventory in order to eliminate those early layers of the process that absorb costs and therefore affect ending inventory costs.<\/p>\n<div style=\"text-align: left;\">\n<table class=\"fin-table acctstatement fw\">\n<caption>BlankBooks, Inc.<br \/>\nIncome Statement<br \/>\nFor the month ending July 31, 20XX<\/caption>\n<thead>\n<tr class=\"u-sr-only\">\n<th scope=\"col\">Financial Categories<\/th>\n<th scope=\"col\">Raw Materials Costs<\/th>\n<th scope=\"col\">Work-in-Progress Costs<\/th>\n<th scope=\"col\">Finished Goods\/Overhead Costs<\/th>\n<th scope=\"col\">Financial Totals<\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td>Sales<\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td class=\"r\">$\u00a0\u00a029,000.00<\/td>\n<\/tr>\n<tr>\n<td colspan=\"5\"><span class=\"u-sr-only\">Subcategory, <\/span><strong>Cost of Goods Sold<\/strong><\/td>\n<\/tr>\n<tr>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Beginning raw materials<\/td>\n<td class=\"r\">$600.00<\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Raw materials purchased<\/td>\n<td class=\"r\">20,270.00<\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Ending raw materials<\/td>\n<td class=\"r\">(470.00)<\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Raw materials transferred to WIP<\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span><\/td>\n<td class=\"r\">$\u00a0 20,400.00<\/td>\n<td>(VC)<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Beginning WIP<\/td>\n<td><\/td>\n<td class=\"r\">&#8211;<\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Direct Labor<\/td>\n<td><\/td>\n<td class=\"r\">6,800.00<\/td>\n<td>(VC)<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Manufacturing overhead<\/td>\n<td><\/td>\n<td class=\"r\">1,200.00<\/td>\n<td>(FC)<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Ending WIP<\/td>\n<td><\/td>\n<td class=\"r\">&#8211;<\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0WIP transferred to finished goods<\/td>\n<td><\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span><\/td>\n<td class=\"r\">$ \u00a0 28,400.00<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Beginning finished goods<\/td>\n<td><\/td>\n<td><\/td>\n<td class=\"r\">&#8211;<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Goods available for sale<\/td>\n<td><\/td>\n<td><\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>28,400.00<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Ending finished goods<\/td>\n<td><\/td>\n<td><\/td>\n<td class=\"r\">(4,175.00)<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Cost of Goods Sold<\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td class=\"r\">$\u00a0\u00a024,225.00<\/td>\n<\/tr>\n<tr>\n<td>Gross Profit<\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>4,775.00<\/td>\n<\/tr>\n<tr>\n<td colspan=\"5\"><span class=\"u-sr-only\">Subcategory, <\/span><strong>Selling, general, and administrative costs<\/strong><\/td>\n<\/tr>\n<tr>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Sales Salaries<\/td>\n<td><\/td>\n<td><\/td>\n<td class=\"r\">$\u00a0 \u00a0 2,000.00<\/td>\n<td>(FC)<\/td>\n<\/tr>\n<tr>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Commissions<\/td>\n<td><\/td>\n<td><\/td>\n<td class=\"r\">870.00<\/td>\n<td>(VC)<\/td>\n<\/tr>\n<tr>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Internet expenses<\/td>\n<td><\/td>\n<td><\/td>\n<td class=\"r\">200.00<\/td>\n<td>(FC)<\/td>\n<\/tr>\n<tr>\n<td>Total selling, general, and administrative costs<\/td>\n<td><\/td>\n<td><\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span><\/td>\n<td class=\"r\">3,070.00<\/td>\n<\/tr>\n<tr>\n<td>Operating income<\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>1,705.00<\/td>\n<\/tr>\n<tr>\n<td>Provision for income taxes<\/td>\n<td><\/td>\n<td><\/td>\n<td class=\"r\">21%<\/td>\n<td class=\"r\">358.05<\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0 1,346.95<span class=\"u-sr-only\">Double line<\/span><\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>Per unit cost, full absorption<\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td class=\"r line-double\">$ \u00a0 \u00a0\u00a0 8.35<span class=\"u-sr-only\">Double line<\/span><\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n<p>&nbsp;<\/p>\n<p>In this case, we produced 500 units that were not sold, so two things happened:<\/p>\n<ol>\n<li style=\"font-weight: 400;\" aria-level=\"1\">The unit cost of the items manufactured went down a bit, because the fixed product costs were allocated over more units.<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\">500 units remained in ending inventory, capturing some of the overall costs on the company\u2019s balance sheet. Those costs will be shown as an expense during the period in which those books are sold (presumably in August).<\/li>\n<\/ol>\n<p>We could perform a CVP analysis based on 3,400 units instead of 2,900, but the bottom line still won\u2019t be the same as the full absorption statement because our CVP analysis assumes production and sales are the same:<\/p>\n<div style=\"text-align: left;\">\n<table class=\"fin-table acctstatement fw\">\n<caption>BlankBooks, Inc.<br \/>\nCVP Analysis at 3,400 Units<br \/>\nFor the month ending July 31, 20XX<\/caption>\n<tbody>\n<tr>\n<th class=\"r\" scope=\"col\"><\/th>\n<th class=\"r\" scope=\"col\">Units<\/th>\n<th class=\"r\" scope=\"col\">$\/Unit<\/th>\n<th class=\"r\" scope=\"col\">Total<\/th>\n<\/tr>\n<\/tbody>\n<tbody>\n<tr>\n<td>Sales<\/td>\n<td class=\"r\">3,400<\/td>\n<td class=\"r\">$\u00a0\u00a0\u00a0\u00a0\u00a010.00<\/td>\n<td class=\"r\">$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a034,000.00<\/td>\n<\/tr>\n<tr>\n<td>Variable costs<\/td>\n<td class=\"r\">3,400<\/td>\n<td class=\"r\">$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a08.30<\/td>\n<td class=\"r\">28,220.00<\/td>\n<\/tr>\n<tr>\n<td>Contribution Margin<\/td>\n<td><\/td>\n<td class=\"r\">$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a01.70<\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>5,780.00<\/td>\n<\/tr>\n<tr>\n<td>Fixed costs<\/td>\n<td><\/td>\n<td><\/td>\n<td class=\"r\">\u00a0\u00a0\u00a0\u00a0\u00a0\u00a03,400.00<\/td>\n<\/tr>\n<tr>\n<td>Operating income<\/td>\n<td><\/td>\n<td><\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a02,380.00<span class=\"u-sr-only\">Double line<\/span><\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>CM ratio<\/td>\n<td><\/td>\n<td class=\"r\">17.00%<\/td>\n<td><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n<p>&nbsp;<\/p>\n<p>The point of this analysis is to illustrate that under absorption costing, operating income changes based on increases or decreases in inventory due to producing more or fewer units than were sold in a period, and managers need to be aware of this. Each type of statement has its place:<\/p>\n<p>Financial accounting requires full absorption accounting<\/p>\n<p>Managerial accounting often uses the contribution margin approach<\/p>\n<p>Remember that financial accounting is after-the-fact, reporting historical results for outside users, and managerial accounting is used by internal decision-makers to plan, direct, and control operations, so the two kinds of costing methods are driven by the needs of the users.<\/p>\n<p>A final difference between the two kinds of costing methods is with income statements. This module\u2019s introduction discussed those income statement distinctions, but let\u2019s review those differences one more time:<\/p>\n<div style=\"text-align: left;\">\n<table class=\"fin-table gridded\" style=\"height: 84px;\">\n<tbody>\n<tr style=\"height: 12px;\">\n<td style=\"font-weight: bold; height: 12px; width: 264.5px;\">Managerial Accounting<\/td>\n<td style=\"font-weight: bold; height: 12px; width: 276.5px;\">Financial Accounting<\/td>\n<\/tr>\n<tr style=\"height: 12px;\">\n<td style=\"font-weight: bold; font-style: italic; height: 12px; width: 264.5px;\">variable costing<\/td>\n<td style=\"font-weight: bold; font-style: italic; height: 12px; width: 276.5px;\">full absorption costing<\/td>\n<\/tr>\n<tr style=\"height: 12px;\">\n<td style=\"height: 12px; width: 264.5px;\">Sales<\/td>\n<td style=\"height: 12px; width: 276.5px;\">Sales<\/td>\n<\/tr>\n<tr style=\"height: 12px;\">\n<td style=\"height: 12px; width: 264.5px;\">Less: Variable product costs and variable SGA<\/td>\n<td style=\"height: 12px; width: 276.5px;\">Less: Cost of Goods sold that include fixed MOH<\/td>\n<\/tr>\n<tr style=\"height: 12px;\">\n<td style=\"height: 12px; width: 264.5px;\">= Contribution margin<\/td>\n<td style=\"height: 12px; width: 276.5px;\">= Gross Profit<\/td>\n<\/tr>\n<tr style=\"height: 12px;\">\n<td style=\"height: 12px; width: 264.5px;\">Less: Fixed MOH and Fixed SGA<\/td>\n<td style=\"height: 12px; width: 276.5px;\">Less: SGA<\/td>\n<\/tr>\n<tr style=\"height: 12px;\">\n<td style=\"height: 12px; width: 264.5px;\">= Operating Income<\/td>\n<td style=\"height: 12px; width: 276.5px;\">= Operating Income<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n<p>&nbsp;<\/p>\n<p>To bring this all together, here is a comprehensive comparison of the two systems:<\/p>\n<p><iframe loading=\"lazy\" src=\"\/\/plugin.3playmedia.com\/show?mf=6352537&amp;p3sdk_version=1.10.1&amp;p=20361&amp;pt=375&amp;video_id=ApRSgmnnEjI&amp;video_target=tpm-plugin-b1hfonz3-ApRSgmnnEjI\" width=\"800px\" height=\"450px\" frameborder=\"0\" marginwidth=\"0px\" marginheight=\"0px\"><\/iframe><\/p>\n<p>You can view the <a href=\"https:\/\/oerfiles.s3.us-west-2.amazonaws.com\/Managerial+Accounting\/Transcripts\/AbsorptionCostingvsVariableCosting_transcript.txt\" target=\"_blank\" rel=\"noopener\">transcript for &#8220;Absorption Costing vs. Variable Costing&#8221; here (opens in new window)<\/a>.<\/p>\n<p>Now check your understanding of the effect of full absorption costing on the bottom line.<\/p>\n<div class=\"textbox tryit\">\n<h3>Practice Question<\/h3>\n<p><iframe loading=\"lazy\" id=\"ohm217770\" class=\"resizable\" src=\"https:\/\/ohm.lumenlearning.com\/multiembedq.php?id=217770&theme=oea&iframe_resize_id=ohm217770\" width=\"100%\" height=\"150\"><\/iframe><\/p>\n<\/div>\n\n\t\t\t <section class=\"citations-section\" role=\"contentinfo\">\n\t\t\t <h3>Candela Citations<\/h3>\n\t\t\t\t\t <div>\n\t\t\t\t\t\t <div id=\"citation-list-93\">\n\t\t\t\t\t\t\t <div class=\"licensing\"><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Original<\/div><ul class=\"citation-list\"><li>Contribution Margin. <strong>Authored by<\/strong>: Joseph Cooke. <strong>Provided by<\/strong>: Lumen Learning. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by\/4.0\/\">CC BY: Attribution<\/a><\/em><\/li><\/ul><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Shared previously<\/div><ul class=\"citation-list\"><li>Principles of Managerial Accounting. <strong>Authored by<\/strong>: Christine Jonick. <strong>Located at<\/strong>: <a target=\"_blank\" href=\"https:\/\/ung.edu\/university-press\/books\/managerial-accounting.php\">https:\/\/ung.edu\/university-press\/books\/managerial-accounting.php<\/a>. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by-sa\/4.0\/\">CC BY-SA: Attribution-ShareAlike<\/a><\/em><\/li><li>Books on display. <strong>Provided by<\/strong>: Unsplash. <strong>Located at<\/strong>: <a target=\"_blank\" href=\"https:\/\/unsplash.com\/photos\/KVby0S0GaH4\">https:\/\/unsplash.com\/photos\/KVby0S0GaH4<\/a>. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/about\/cc0\">CC0: No Rights Reserved<\/a><\/em><\/li><\/ul><div class=\"license-attribution-dropdown-subheading\">All rights reserved content<\/div><ul class=\"citation-list\"><li>Absorption Costing cs. Variable Costing. <strong>Authored by<\/strong>: Edspira. <strong>Located at<\/strong>: <a target=\"_blank\" href=\"https:\/\/youtu.be\/ApRSgmnnEjI\">https:\/\/youtu.be\/ApRSgmnnEjI<\/a>. <strong>License<\/strong>: <em>All Rights Reserved<\/em>. <strong>License Terms<\/strong>: Standard YouTube License<\/li><\/ul><\/div>\n\t\t\t\t\t\t <\/div>\n\t\t\t\t\t <\/div>\n\t\t\t <\/section>","protected":false},"author":364389,"menu_order":14,"template":"","meta":{"_candela_citation":"[{\"type\":\"original\",\"description\":\"Contribution Margin\",\"author\":\"Joseph Cooke\",\"organization\":\"Lumen Learning\",\"url\":\"\",\"project\":\"\",\"license\":\"cc-by\",\"license_terms\":\"\"},{\"type\":\"cc\",\"description\":\"Principles of Managerial Accounting\",\"author\":\"Christine Jonick\",\"organization\":\"\",\"url\":\"https:\/\/ung.edu\/university-press\/books\/managerial-accounting.php\",\"project\":\"\",\"license\":\"cc-by-sa\",\"license_terms\":\"\"},{\"type\":\"copyrighted_video\",\"description\":\"Absorption Costing cs. Variable Costing\",\"author\":\"Edspira\",\"organization\":\"\",\"url\":\"https:\/\/youtu.be\/ApRSgmnnEjI\",\"project\":\"\",\"license\":\"arr\",\"license_terms\":\"Standard YouTube License\"},{\"type\":\"cc\",\"description\":\"Books on display\",\"author\":\"\",\"organization\":\"Unsplash\",\"url\":\"https:\/\/unsplash.com\/photos\/KVby0S0GaH4\",\"project\":\"\",\"license\":\"cc0\",\"license_terms\":\"\"}]","CANDELA_OUTCOMES_GUID":"","pb_show_title":"on","pb_short_title":"","pb_subtitle":"","pb_authors":[],"pb_section_license":""},"chapter-type":[],"contributor":[],"license":[],"class_list":["post-93","chapter","type-chapter","status-publish","hentry"],"part":23,"_links":{"self":[{"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/wp-json\/pressbooks\/v2\/chapters\/93","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/wp-json\/pressbooks\/v2\/chapters"}],"about":[{"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/wp-json\/wp\/v2\/types\/chapter"}],"author":[{"embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/wp-json\/wp\/v2\/users\/364389"}],"version-history":[{"count":24,"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/wp-json\/pressbooks\/v2\/chapters\/93\/revisions"}],"predecessor-version":[{"id":2155,"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/wp-json\/pressbooks\/v2\/chapters\/93\/revisions\/2155"}],"part":[{"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/wp-json\/pressbooks\/v2\/parts\/23"}],"metadata":[{"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/wp-json\/pressbooks\/v2\/chapters\/93\/metadata\/"}],"wp:attachment":[{"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/wp-json\/wp\/v2\/media?parent=93"}],"wp:term":[{"taxonomy":"chapter-type","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/wp-json\/pressbooks\/v2\/chapter-type?post=93"},{"taxonomy":"contributor","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/wp-json\/wp\/v2\/contributor?post=93"},{"taxonomy":"license","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/wp-json\/wp\/v2\/license?post=93"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}