## Full Absorption Costing

### Learning Outcomes

• Distinguish between variable costing and full absorption costing

Let’s take another look at the variable costing model for BlankBooks, Inc. for a $1,530 target profit: - Remember, we were assuming throughout this module that BlankBooks, Inc. uses a Just-in-Time inventory system, only manufacturing books as they are ordered, and that there is no finished goods inventory on hand at the beginning or end of the period. Let’s also assume that the company hit the sales goal exactly, producing and selling 2,900 books in July. Here is the income statement prepared by the financial accountants for external users using the GAAP-mandated full absorption costing method: - Let’s do a quick review of variable costing before we dive into absorption costing: When all units manufactured (2,900) are sold (2,900), operating income under absorption costing is the same as it is under variable costing,$1,530.00. Under both costing methods, $3,400.00 of fixed factory overhead costs is deducted to arrive at operating income. It just appears in two different line items. • On the variable costing statement, the$3,400.00 in fixed costs follows the contribution margin line.
• Under absorption costing, the $3,400.00 is split between cost of goods sold and SGA based on whether the amount is a product cost or a period cost (look for the FC). Under absorption costing, the per-unit cost of$8.41 is determined by dividing cost of goods available for sale (goods manufactured) by number of units sold:

\$24,400.00 / 2,900 = 8.41379310… rounded to the nearest penny = 8.41

Here is a more in-depth illustration of absorption costing:

Before we go on to compare results of operations under the two systems, let’s check your understanding of the concept of absorption costing.