University of San Jose – Recoletos

School of Business and Management | Accountancy and Finance Department

Cost Accounting and Control

Module 4: Variable, Absorption, and

Throughput Costing Variable Costing

Introduction Sales xx
Variable COGS xx
The default costing approach is termed as the Absorption Costing Variable S&A xx
(Full Costing), which treats the costs of all manufacturing components Contribution Margin xx
(direct material, direct labor, variable overhead, and fixed overhead) as Fixed COGS xx
inventoriable or product costs. It is the traditional approach to product Fixed S&A xx
costing; it must be used for external financial statements and tax Net Income xx
returns. In this module, you will be introduced to two more alternative
approaches that managers may use in determining its product costs, Throughput Costing
namely: Variable Costing and Throughput Costing.
Sales xx
Under the Variable Costing approach (Direct Costing), product costs Direct Materials xx
are composed only of product costs that vary directly with the activity Throughput Margin xx
level, thus excluding the fixed factory overhead. The justification for Direct Labor xx
such is that the fixed factory overhead does not move together with Variable OH xx
the activity level (units of production) and remains constant from Variable S&A xx
period to period, whatever the production level is. Such justification Fixed OH xx
becomes the basis for classifying the fixed factory overhead as a Fixed S&A xx
period cost. It is called as direct costing because of the inclusion of Net Income xx
direct production components as inventoriable.
Difference in Net Income for Variable and Absorption
Under the Throughput Costing (also called as Supervariable Costing),
only direct materials are considered as inventoriable, while the rest are
Costing
considered as period costs. A more realistic look at the three variable
costs will bring us to see that variable factory overhead is not always
driven by production level, and direct labor may not always be driven
by production level and may even have some fixed components in
some instances. The only cost that truly varies with production level is
direct materials, because when more units are produced, definitely
more materials will be needed, too. This cannot be exactly said of
direct labor and variable factory overhead.

Glossary

Absorption Costing – the traditional approach that includes direct

materials, direct labor, variable overhead, and fixed overhead as
product costs; period costs include selling and administrative costs, When units produced equal units sold (no changes in inventory levels),
whether variable or fixed. there will be no differences in the net income figures reported for
absorption costing, variable costing, and throughput costing. The cost
Throughput Costing – an alternative approach that only considers of goods sold under absorption will be higher compared to the figure
direct materials as product cost, leaving direct labor, variable under variable costing, but the period costs under absorption costing
overhead, fixed overhead, selling and administrative costs as period will be lower than the figure under variable costing. In sum, all costs
costs reported for both costing approaches will be the same, thus, resulting
in the same net income figures. A similar case happens for variable
Variable Costing – an alternative approach that considers direct and throughput costing, since there are no changes in inventory
materials, direct labor, variable overhead as product costs; fixed levels.
overhead and selling and administrative costs are considered as
period costs When units produced exceed units sold, this will result in units in
ending inventory. Some of the fixed overhead costs (considered as
product costs) will be deferred in ending inventory under absorption
Comparison among Absorption, Variable, and costing, while fixed overhead costs under variable costing will be
Throughput Costing charged as expense in its entirety, since it is a period cost. The fixed
overhead charged as expense under absorption costing is only a
portion of the total, since some of it is deferred in ending inventory,
Cost Items Absorption Variable Throughput
whereas, the fixed overhead charged as expense under variable
Direct Materials Product Product Product costing is the entire amount. Thus, the fixed overhead charged as
Direct Labor Product Product Period expense under absorption costing is lower than the fixed overhead
charged as expense under variable costing. This eventually results to
Variable Overhead Product Product Period
higher net income reported under absorption costing as compared to
Fixed Overhead Period Period Period the net income reported under absorption costing.
Variable S&A Period Period Period As for throughput costing, similar conclusions may be made, keeping
Period in mind its product cost and period cost compositions.
Fixed S&A Period Period

The table above is a simplified depiction of the differences among

Reconciling Net Income Figures
Absorption, Variable, and Throughput Costing.
Absorption to Variable
You have already learned from previous lessons that product costs Absorption Costing Net Income xx
are the items that will go into the determination of cost of goods sold, Add: Fixed Overhead released from Inv, Beg xx
and is therefore affected by fluctuations in production units. Less: Fixed Overhead deferred in Inv, End. xx
Variable Costing Net Income xx
Absorption Costing
Variable to Throughput
Sales xx Variable Costing Net Income xx
Cost of Goods Sold xx Add: DL and VOH released from Inv, Beg. xx
Gross Margin xx Less: DL and VOH deferred on Inv, End xx
Operating Expenses xx Throughput Costing Net Income xx
Net Income xx .
University of San Jose – Recoletos
School of Business and Management | Accountancy and Finance Department
Cost Accounting and Control

Discussion Problems

Problem 1

Coastal Corporation, which uses throughput costing, began operations at the start of the current year. Planned and actual production equaled 20,000
units, and sales totaled 17,500 units at P95 per unit. Cost data for the year were as follows:

Direct Materials (per unit) 18

Conversion Costs
Direct labor 160,000
Variable manufacturing overhead 280,000
Fixed manufacturing overhead 340,000
Selling and administrative costs (total) 430,000

The company classifies direct materials as a throughput cost.

Required:

1. Compute the company’s total cost per year

2. How much of this cost would be held in year-end inventory under (1) absorption costing, (2) variable costing, and (3) throughput costing?
How much of the company's total cost for the year would appear on the period's income statement under (1) absorption costing, (2) variable
costing, and (3) throughput costing?
3. Compute the year's net income under each of the following: Absorption Costing, Variable Costing, and Throughput Costing.

Problem 2

Information taken from Calgary Corporation's May accounting records follows.

Direct materials used 150,000

Direct labor 80,000
Variable factory overhead 30,000
Fixed factory overhead 100,000
Variable selling and admin costs 51,000
Fixed selling and admin costs 60,000
Sales revenue 625,000

Required:

1. Assuming the use of variable costing, compute the inventoriable costs for the month.
2. Compute the month's inventoriable costs by using absorption costing.
3. Assume that anticipated and actual production totaled 20,000 units, and that 18,000 units were sold during May. Determine the amount of
fixed manufacturing overhead and fixed selling and administrative costs that would be expensed for the month under (1) variable costing and
(2) absorption costing.
4. Assume the same data as in requirement "3." Compute the contribution margin that would be reported on a variable-costing income
statement.

Problem 3

The following data relate to Vancouver Company, a new corporation, during a period when the firm produced and sold 100,000 units and 90,000 units,
respectively:

Direct materials used 400,000

Direct labor 200,000
Fixed overhead 250,000
Variable overhead 120,000
Fixed selling and admin expenses 300,000
Variable selling and admin expenses 45,000

The company met its original planned production target of 100,000 units. There were no variances during the period, and the firm's selling price is P15
per unit.

Required:

1. What is the cost of finished goods inventory, end under the variable-costing?
2. Calculate the company's variable-costing net income.
3. Calculate the company's absorption-costing net income.

Problem 4

South Sea began business at the start of the current year and maintains its accounting records on an absorption-cost basis. The following selected
information appeared on the company's income statement and end-of-year balance sheet:

Income statement data:

Sales revenues (35,000 units x 22) 770,000
Gross margin 210,000
Total sales and admin expense 160,000

Balance sheet data:

Ending finished goods inventory (12,000 units) 192,000

South achieved its planned production level for the year. The company's fixed manufacturing overhead totaled P141,000, and the firm paid a 10%
commission based on gross peso sales to its sales force.

1. How many units did South plan to produce during the year?
2. How much fixed manufacturing overhead did the company apply to each unit produced?
3. Compute South's cost of goods sold.
4. How much variable cost did the company attach to each unit manufactured?
University of San Jose – Recoletos
School of Business and Management | Accountancy and Finance Department
Cost Accounting and Control

Problem 5

Leopard Corporation has fixed manufacturing cost of P12 per unit. Consider the three independent cases that follow.

Case A: Absorption- and variable costing net income each totaled P240,000 in a period when the firm produced 18,000 units.
Case B: Absorption-costing net income totaled P320,000 in a period when finished-goods inventory levels rose by 7,000 units.
Case C: Absorption-costing net income and variable-costing net income respectively totaled P220,000 and P250,000 in a period when the beginning
finished-goods inventory was 14,000 units.

Required:

1. In Case A, how many units were sold during the period?

2. In Case B, how much income would Leopard report under variable costing?
3. In Case C, how many units were in the ending finished-goods inventory?

Problem 6

Salt has per-unit fixed and variable manufacturing costs of P40 and P15, respectively. Variable selling and administrative costs are P9 per unit.
Consider the two independent cases that follow for the firm.

Case A: Variable-costing net income, P110,000; sales, 6,000 units; production, 6,000 units
Case B: Variable-costing net income, P178,000; sales, 7,500 units; production, 7,100 units

Required:

1. From a product-costing perspective, what is the basic difference between absorption costing and variable costing?
2. Compute Salt's absorption-costing net income in Case A.
3. Compute Salt's absorption-costing net income in Case B.