{"id":891,"date":"2015-12-27T15:27:48","date_gmt":"2015-12-27T15:27:48","guid":{"rendered":"https:\/\/courses.candelalearning.com\/managacct2x1xmaster\/?post_type=chapter&#038;p=891"},"modified":"2015-12-27T15:27:48","modified_gmt":"2015-12-27T15:27:48","slug":"chapter-6-key-points","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/suny-managacct\/chapter\/chapter-6-key-points\/","title":{"raw":"Chapter 6 Key Points","rendered":"Chapter 6 Key Points"},"content":{"raw":"<h2>Absorption vs. Variable Costing<\/h2>\r\nProduct cost includes Direct Materials, direct labor and overhead.\u00a0\u00a0 Period costs are selling, general and administrative costs.\r\n\r\nContribution Margin is Sales \u2013 Variable Costs.\r\n\r\n<strong><em>Absorption Costing (or full costing):<\/em><\/strong>\r\n<ul>\r\n\t<li>Typically used for financial reporting (GAAP)<\/li>\r\n\t<li>ALL manufacturing costs are included in the cost (direct materials, direct labor, fixed and variable overhead)<\/li>\r\n\t<li>Can be misleading as some costs are not affected by products<\/li>\r\n\t<li>Fixed manufacturing overhead costs are applied to units PRODUCED and not just unit sold<\/li>\r\n\t<li>Fixed manufacturing overhead per unit calculated as Fixed manufacturing costs divided by units PRODUCED.<\/li>\r\n\t<li>Cost of goods sold = units sold x absorption cost per unit (including direct materials, direct labor, fixed and variable overhead)<\/li>\r\n<\/ul>\r\n<strong><em>Variable Costing:<\/em><\/strong>\r\n<ul>\r\n\t<li>ONLY includes product variable costs meaning costs that increase with volume (DM, DL &amp; Variable OH)<\/li>\r\n\t<li>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<li>Can provide more accurate information for decision makers as costs are better tied to production levels<\/li>\r\n\t<li>Can be applied to ALL costs and not just product costs.<\/li>\r\n<\/ul>\r\n<strong><em>Comparing Absorption and Variable Cost per unit:<\/em><\/strong>\r\n<table>\r\n<tbody>\r\n<tr>\r\n<td>&nbsp;<\/td>\r\n<td style=\"text-align: center\"><strong>Absorption<\/strong><\/td>\r\n<td style=\"text-align: center\"><strong>Variable<\/strong><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Direct Materials<\/td>\r\n<td style=\"text-align: center\">Include<\/td>\r\n<td style=\"text-align: center\">Include<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Direct Labor<\/td>\r\n<td style=\"text-align: center\">Include<\/td>\r\n<td style=\"text-align: center\">Include<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Overhead:<\/td>\r\n<td style=\"text-align: center\">&nbsp;<\/td>\r\n<td style=\"text-align: center\">&nbsp;<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0\u00a0 Variable Overhead<\/td>\r\n<td style=\"text-align: center\">Include<\/td>\r\n<td style=\"text-align: center\">Include<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0\u00a0 Fixed Overhead<\/td>\r\n<td style=\"text-align: center\">Include<\/td>\r\n<td style=\"text-align: center\">DO NOT include<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Total Product Costs<\/td>\r\n<td style=\"text-align: center\">Sum<\/td>\r\n<td style=\"text-align: center\">sum<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00f7 Total Units<\/td>\r\n<td>\u00f7 Total Units<\/td>\r\n<td>\u00f7 Total Units<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Product Cost per Unit<\/td>\r\n<td>= Cost per unit<\/td>\r\n<td>= Cost per unit<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<em>Note: Same formula can be applied for each product cost (Cost \u00f7 Units produced) to get direct material cost per unit, direct labor per unit, etc<\/em>.\r\n\r\n<strong><em>Income Statement Formats:<\/em><\/strong>\r\n<ul>\r\n\t<li>Absorption Costing \u2013 this is your standard income statement showing Sales \u2013 Cost of Goods sold = Gross Margin (or Gross Profit) \u2013 Operating Expenses = Net Income and cost of goods sold is based on the number of units SOLD x absorption cost per unit.<\/li>\r\n\t<li>Variable Costing \u2013 this is a Contribution Margin Income Statement showing Sales \u2013 VARIABLE expenses = Contribution Margin \u2013 Fixed Expenses = Net Income and variable expenses are based on number of units sold x variable cost per unit.<\/li>\r\n\t<li>Net income on the two reports can be different if units produced do not equal units sold.<\/li>\r\n<\/ul>\r\nClick <a href=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images-archive-read-only\/wp-content\/uploads\/sites\/1430\/2016\/03\/04031455\/Absorption-Variable-Key-Takeaway.pdf\">Absorption Variable Key Takeaway<\/a> for a printable copy.","rendered":"<h2>Absorption vs. Variable Costing<\/h2>\n<p>Product cost includes Direct Materials, direct labor and overhead.\u00a0\u00a0 Period costs are selling, general and administrative costs.<\/p>\n<p>Contribution Margin is Sales \u2013 Variable Costs.<\/p>\n<p><strong><em>Absorption Costing (or full costing):<\/em><\/strong><\/p>\n<ul>\n<li>Typically used for financial reporting (GAAP)<\/li>\n<li>ALL manufacturing costs are included in the cost (direct materials, direct labor, fixed and variable overhead)<\/li>\n<li>Can be misleading as some costs are not affected by products<\/li>\n<li>Fixed manufacturing overhead costs are applied to units PRODUCED and not just unit sold<\/li>\n<li>Fixed manufacturing overhead per unit calculated as Fixed manufacturing costs divided by units PRODUCED.<\/li>\n<li>Cost of goods sold = units sold x absorption cost per unit (including direct materials, direct labor, fixed and variable overhead)<\/li>\n<\/ul>\n<p><strong><em>Variable Costing:<\/em><\/strong><\/p>\n<ul>\n<li>ONLY includes product variable costs meaning costs that increase with volume (DM, DL &amp; Variable OH)<\/li>\n<li>Does not include FIXED costs as volume levels do not change these costs (fixed costs treated as period costs not product costs)<\/li>\n<li>Can provide more accurate information for decision makers as costs are better tied to production levels<\/li>\n<li>Can be applied to ALL costs and not just product costs.<\/li>\n<\/ul>\n<p><strong><em>Comparing Absorption and Variable Cost per unit:<\/em><\/strong><\/p>\n<table>\n<tbody>\n<tr>\n<td>&nbsp;<\/td>\n<td style=\"text-align: center\"><strong>Absorption<\/strong><\/td>\n<td style=\"text-align: center\"><strong>Variable<\/strong><\/td>\n<\/tr>\n<tr>\n<td>Direct Materials<\/td>\n<td style=\"text-align: center\">Include<\/td>\n<td style=\"text-align: center\">Include<\/td>\n<\/tr>\n<tr>\n<td>Direct Labor<\/td>\n<td style=\"text-align: center\">Include<\/td>\n<td style=\"text-align: center\">Include<\/td>\n<\/tr>\n<tr>\n<td>Overhead:<\/td>\n<td style=\"text-align: center\">&nbsp;<\/td>\n<td style=\"text-align: center\">&nbsp;<\/td>\n<\/tr>\n<tr>\n<td>\u00a0\u00a0 Variable Overhead<\/td>\n<td style=\"text-align: center\">Include<\/td>\n<td style=\"text-align: center\">Include<\/td>\n<\/tr>\n<tr>\n<td>\u00a0\u00a0 Fixed Overhead<\/td>\n<td style=\"text-align: center\">Include<\/td>\n<td style=\"text-align: center\">DO NOT include<\/td>\n<\/tr>\n<tr>\n<td>Total Product Costs<\/td>\n<td style=\"text-align: center\">Sum<\/td>\n<td style=\"text-align: center\">sum<\/td>\n<\/tr>\n<tr>\n<td>\u00f7 Total Units<\/td>\n<td>\u00f7 Total Units<\/td>\n<td>\u00f7 Total Units<\/td>\n<\/tr>\n<tr>\n<td>Product Cost per Unit<\/td>\n<td>= Cost per unit<\/td>\n<td>= Cost per unit<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p><em>Note: Same formula can be applied for each product cost (Cost \u00f7 Units produced) to get direct material cost per unit, direct labor per unit, etc<\/em>.<\/p>\n<p><strong><em>Income Statement Formats:<\/em><\/strong><\/p>\n<ul>\n<li>Absorption Costing \u2013 this is your standard income statement showing Sales \u2013 Cost of Goods sold = Gross Margin (or Gross Profit) \u2013 Operating Expenses = Net Income and cost of goods sold is based on the number of units SOLD x absorption cost per unit.<\/li>\n<li>Variable Costing \u2013 this is a Contribution Margin Income Statement showing Sales \u2013 VARIABLE expenses = Contribution Margin \u2013 Fixed Expenses = Net Income and variable expenses are based on number of units sold x variable cost per unit.<\/li>\n<li>Net income on the two reports can be different if units produced do not equal units sold.<\/li>\n<\/ul>\n<p>Click <a href=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images-archive-read-only\/wp-content\/uploads\/sites\/1430\/2016\/03\/04031455\/Absorption-Variable-Key-Takeaway.pdf\">Absorption Variable Key Takeaway<\/a> for a printable copy.<\/p>\n","protected":false},"author":1195,"menu_order":5,"template":"","meta":{"_candela_citation":"[]","CANDELA_OUTCOMES_GUID":"","pb_show_title":"on","pb_short_title":"","pb_subtitle":"","pb_authors":[],"pb_section_license":""},"chapter-type":[],"contributor":[],"license":[],"class_list":["post-891","chapter","type-chapter","status-publish","hentry"],"part":352,"_links":{"self":[{"href":"https:\/\/courses.lumenlearning.com\/suny-managacct\/wp-json\/pressbooks\/v2\/chapters\/891","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/courses.lumenlearning.com\/suny-managacct\/wp-json\/pressbooks\/v2\/chapters"}],"about":[{"href":"https:\/\/courses.lumenlearning.com\/suny-managacct\/wp-json\/wp\/v2\/types\/chapter"}],"author":[{"embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/suny-managacct\/wp-json\/wp\/v2\/users\/1195"}],"version-history":[{"count":1,"href":"https:\/\/courses.lumenlearning.com\/suny-managacct\/wp-json\/pressbooks\/v2\/chapters\/891\/revisions"}],"predecessor-version":[{"id":893,"href":"https:\/\/courses.lumenlearning.com\/suny-managacct\/wp-json\/pressbooks\/v2\/chapters\/891\/revisions\/893"}],"part":[{"href":"https:\/\/courses.lumenlearning.com\/suny-managacct\/wp-json\/pressbooks\/v2\/parts\/352"}],"metadata":[{"href":"https:\/\/courses.lumenlearning.com\/suny-managacct\/wp-json\/pressbooks\/v2\/chapters\/891\/metadata\/"}],"wp:attachment":[{"href":"https:\/\/courses.lumenlearning.com\/suny-managacct\/wp-json\/wp\/v2\/media?parent=891"}],"wp:term":[{"taxonomy":"chapter-type","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/suny-managacct\/wp-json\/pressbooks\/v2\/chapter-type?post=891"},{"taxonomy":"contributor","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/suny-managacct\/wp-json\/wp\/v2\/contributor?post=891"},{"taxonomy":"license","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/suny-managacct\/wp-json\/wp\/v2\/license?post=891"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}