{"id":399,"date":"2015-10-02T13:27:20","date_gmt":"2015-10-02T13:27:20","guid":{"rendered":"https:\/\/courses.candelalearning.com\/managacct2x10xmaster\/?post_type=chapter&p=399"},"modified":"2015-12-27T15:30:33","modified_gmt":"2015-12-27T15:30:33","slug":"variable-costing","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/suny-managacct\/chapter\/variable-costing\/","title":{"raw":"6.2 Variable Costing","rendered":"6.2 Variable Costing"},"content":{"raw":"Variable costing <\/strong>(also known as direct costing) treats all fixed manufacturing costs as period costs to be charged to expense in the period received. Under variable costing, companies treat only variable manufacturing costs as product costs. The logic behind this expensing of fixed manufacturing costs is that the company would incur such costs whether a plant was in production or idle. Therefore, these fixed costs do not specifically relate to the manufacture of products.\u00a0 The following video explains the concepts in variable costing:\r\n\r\nhttps:\/\/youtu.be\/kfJqYGQOLes\r\n\r\nProduct costs, under variable costing, includes the VARIABLE costs only like direct materials, direct labor and variable overhead.\u00a0 Fixed overhead would not be included as a product cost!\u00a0 We calculate product cost per unit as:\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
Direct Materials<\/td>\r\n<\/tr>\r\n
+ Direct Labor<\/td>\r\n<\/tr>\r\n
+ Variable Overhead<\/td>\r\n<\/tr>\r\n
= Total Product Cost<\/td>\r\n<\/tr>\r\n
\u00f7 Total Units Produced<\/td>\r\n<\/tr>\r\n
= Product cost per unit<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nThe income statement we will use in not Generally Accepted Accounting Principles so is not typically included in published financial statements outside the company.\u00a0 This contribution margin income statement would be used for internal purposes only.\u00a0 You should remember, the contribution margin income statement separates variable costs and fixed costs (whether product or period does not matter) and calculates a contribution margin (this is sales - variable costs).\u00a0 Now, let's continue with our example Bradley Company.\r\n\r\nBradley Company had the following information for May:\r\n
    \r\n\t
  • Direct materials $13,000<\/li>\r\n\t
  • Direct labor $15,000<\/li>\r\n\t
  • Variable overhead $5,000<\/li>\r\n\t
  • Fixed overhead $6,000<\/li>\r\n\t
  • Fixed selling expenses $15,000<\/li>\r\n\t
  • Variable selling expenses $0.20 per unit<\/li>\r\n\t
  • Administrative expenses $12,000<\/li>\r\n\t
  • 10,000 units produced<\/li>\r\n\t
  • 9,000 units sold (1,000 remain in ending finished goods inventory)<\/li>\r\n\t
  • Sales price $8 per unit<\/li>\r\n<\/ul>\r\nFirst, we will calculate the variable cost product cost per unit:\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
    Direct Materials<\/td>\r\n$ 13,000<\/td>\r\n<\/tr>\r\n
    + Direct Labor<\/td>\r\n$ 15,000<\/td>\r\n<\/tr>\r\n
    + Variable Overhead<\/td>\r\n$ 5,000<\/span><\/td>\r\n<\/tr>\r\n
    = Total Product Cost<\/td>\r\n$ 33,000<\/td>\r\n<\/tr>\r\n
    \u00f7 Total Units Produced<\/td>\r\n\u00f7 10,000<\/span><\/td>\r\n<\/tr>\r\n
    = Product cost per unit<\/td>\r\n$ 3.30<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nNext, we calculate the contribution margin format income statement under variable costing:\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
    Bradley Company<\/strong><\/td>\r\n<\/tr>\r\n
    Income Statement (variable)<\/strong><\/td>\r\n<\/tr>\r\n
    For Month Ended May<\/strong><\/td>\r\n<\/tr>\r\n
    Sales (9,000 x $8 per unit)<\/td>\r\n<\/td>\r\n$ 72,000<\/td>\r\n<\/tr>\r\n
    Variable Costs:<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/tr>\r\n
    \u00a0 \u00a0 Cost of goods sold (9,000 x $3.30 per unit)<\/td>\r\n\u00a029,700<\/td>\r\n<\/td>\r\n<\/tr>\r\n
    \u00a0 \u00a0 Selling expenses (9,000 x $0.20 per unit)<\/td>\r\n\u00a01,800<\/span><\/td>\r\n<\/td>\r\n<\/tr>\r\n
    \u00a0 \u00a0 Total variable costs<\/td>\r\n<\/td>\r\n\u00a0\u00a0 31,500<\/span><\/td>\r\n<\/tr>\r\n
    Contribution Margin<\/td>\r\n<\/td>\r\n\u00a0\u00a0 40,500<\/td>\r\n<\/tr>\r\n
    Fixed Costs:<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/tr>\r\n
    \u00a0 \u00a0 Fixed overhead\u00a0 (fixed portion only)<\/td>\r\n\u00a0 6,000<\/td>\r\n<\/td>\r\n<\/tr>\r\n
    \u00a0 \u00a0 Selling expenses (fixed portion only)<\/td>\r\n\u00a0\u00a0\u00a0 15,000<\/td>\r\n<\/td>\r\n<\/tr>\r\n
    \u00a0 \u00a0 Administrative expenses<\/td>\r\n\u00a012,000<\/span><\/td>\r\n<\/td>\r\n<\/tr>\r\n
    \u00a0 \u00a0 Total Fixed expenses<\/td>\r\n<\/td>\r\n\u00a0\u00a0\u00a0 33,000<\/span><\/td>\r\n<\/tr>\r\n
    Net Operating Income<\/strong><\/td>\r\n\u00a0\u00a0\u00a0<\/strong><\/td>\r\n$ 7,500<\/strong><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nIn variable costing, it is important to remember:\r\n
      \r\n\t
    • ONLY includes variable costs meaning costs that increase with volume<\/li>\r\n\t
    • Does not include FIXED costs as volume levels do not change these costs (fixed costs treated as period costs not product costs)<\/li>\r\n\t
    • Can provide more accurate information for decision makers as costs are better tied to production levels<\/li>\r\n\t
    • Can be applied to ALL costs and not just product costs.<\/li>\r\n\t
    • Uses Contribution Margin Income Statement showing Sales \u2013 VARIABLE expenses = Contribution Margin \u2013 Fixed Expenses = Net Income and is based on the number of units SOLD.<\/li>\r\n<\/ul>\r\n ","rendered":"

      Variable costing <\/strong>(also known as direct costing) treats all fixed manufacturing costs as period costs to be charged to expense in the period received. Under variable costing, companies treat only variable manufacturing costs as product costs. The logic behind this expensing of fixed manufacturing costs is that the company would incur such costs whether a plant was in production or idle. Therefore, these fixed costs do not specifically relate to the manufacture of products.\u00a0 The following video explains the concepts in variable costing:<\/p>\n