NOTES IN SCM CHAPTER 3: PRODUCT COSTING

Absorption and Variable Costing

SIMILARITIES

 All variable costs are inventoriable

DIFFERENCES

1. Treatment of fixed manufacturing overhead (FOH)

2. Income statement presentation of the different costs.

Absorption – ginawa natin sa Cost Accounting;

Product cost/inventoriable cost/manufacturing cost/ assignable cost= DM+DL+FOH

Variable Costing

Product cost/inventoriable cost/manufacturing cost/ assignable cost= DM+DL+ variable FOH

Q: Saan napunta yung fixed overhead? -Opex

EFFECTS OF CHANGING INVENTORY LEVELS

ABSORPTION VARIABLE THROUGHPUT

sales   
Cost of sales (inventory) DM, DL, Variable FOH, DM, DL, Variable FOH DM
Fixed FOH
Higher inventory Lower inventory Lowest inventory
Gross profit  Always greater than the Highest gross profit.
gross profit of absorption
costing
Opex Variable Opex, fixed Variable Opex, Fixed Opex, Variable Opex, Fixed
Opex Fixed FOH Opex, Fixed FOH, Variable
FOH, Direct Labor
Operating Income/ EBIT Production = sales A=V=T
Production > sales A>V>T
Production < sales A<V<T

If production = sales or kung yung naproduce mo ay equal sa nabenta mo, therefore

operating income (absorption costing) = operating income (variable costing)
If production > sales or kung hindi lahat ng pinroduce ay nabenta, therefore
operating income (absorption costing) > operating income (variable costing)
If production < sales or kung mas marami kang nabenta kesa sa pinroduce (dahil sa beg inventory)
operating income (absorption costing) < operating income (variable costing)

Q: bakit hindi equal ang Operating Income nila? - kapag mas maraming sales, mas maraming
nababawas kay absorption dahil nileless lang sa kanya kapag nabenta. Unlike sa variable costing na kung
ano talaga yung naincur, yun yung ileless.
 PRODUCTION vs SALES INVENTORY
P=S Unchanged
P>S Increased
P<S Decreased

DIFFERENCES IN INCOME STATEMENT PRESENTATION

ABSORPTION VARIABLE
Sales Sales
Less: COGS Less: Variable Manufacturing Cost
GP Manufacturing Contribution Margin
Less: Variable Non manufacturing Cost Less: Variable Non-manufacturing cost
Fixed Non manufacturing Cost Contribution Margin
Operating Income Less: Fixed Manufacturing Cost
Operating Income

BENEFITS OF ABSORPTION COSTING

1. Provides matching of costs and benefits

2. Consistent with GAAP and requirement for the reporting of income of Income Tax Returns.

LIMITATION OF ABSORPTION COSTING

1. When a greater (less) number of products are produced than are sold during a period, it causes
inventory to increase (decrease).

BENEFITS OF VARIABLE COSTING

1. Impact on profits of changes in sales volume is more obvious

2. By not including FOH in the calculation of costs to produce, companies are able to make better
and more informed decisions about profitability and product mix.
3. Operating income is directly related to sales levels and is not influenced by changes in inventory
levels and is not influenced by changes in inventory levels due to production and sales variances.
4. Variance analysis of FOH is less confusing (Actual vs Budgeted)