VARIABLE, ABSORPTION AND

THROUGHPUT COSTING
Joey Raine Jamero, CPA
OBJECTIVES
Introduction to Absorption, Variable and Throughput Costing
Recap: Cost Valuation Methods
Product Cost Approaches
Absorption Costing Model
Variable Costing Model
Throughput Costing Model
Differences Between the Costing Methods
Reconciling Net Income
Absorption, Variable and Throughput Costing 3

INTRODUCTION
Recap: Factory Overhead Accounting
• Overhead is any cost incurred to make products or perform a service
that is not a direct material or a direct labor.
• Traditionally, manufacturers only consider direct materials and direct
labor as product costs. This means overhead was often viewed as an
"additional" necessary cost, and was more often than not, immaterial and
insignificant.
• Regardless of where costs are incurred, for a company to be profitable,
product or service selling prices must cover all costs. Tracing direct
materials and direct labor creates few accounting challenges since it can
be easily traced to the product or service output.
• On the contrary, indirect costs or overhead cannot be directly traced to
separate distinguishable outputs. Because of this, the need for other cost
allocation systems were developed.

In this module, we will learn the three costing approaches, which are
ABSORPTION COSTING, VARIABLE COSTING and THROUGHPUT
COSTING.
Absorption, Variable and Throughput Costing 4

RECAP: COST VALUATION

METHODS
Actual Costing. This is a valuation method
whereby production inputs are valued at the
actual cost, which is the actual amount paid for
direct materials, direct labor and overheat costs
in determining the cost of Work in Process
Inventory. All factory overhead incurred (debit
to Factory Overhead Control) would be applied
to Work-in-Process (credit Factory Overhead
Control or credit Applied Factory Overhead).
Absorption, Variable and Throughput Costing 5

RECAP: COST VALUATION

METHODS
Normal Costing. This is a valuation method
that uses actual direct material, actual direct
labor, and applied overhead (estimated using
predetermined overhead rates) in determining
the cost of Work in Process Inventory. This
workbook assumes the use of normal costing.
Estimated overhead costs are divided by
estimated production for the year to
determine an application rate. This will
smooth out monthly variations in overhead
costs and allow a more uniform product cost.
 ILLUSTRATION
Mark Lee Company produces alien eyeglasses with the following
information:

Sales price per unit - P60.00

Direct Materials per unit - 20.04
Direct Labor per unit - 10.50
Variable OH Cost per unit - 1.18

Budgeted Annual Fixed OH Cost - P616,000

Budgeted Annual Capacity in units - 400,000

What is the cost per unit of the alien eyeglasses?

 ILLUSTRATION
Direct Materials per unit - 20.04
Direct Labor per unit - 10.50
Variable OH Cost per unit - 1.18
Total Variable Cost per unit P31.72
-------------------------------------------------------------------------------------------------------
Budgeted Annual Fixed OH Cost - P616,000
Budgeted Annual Capacity in units - 400,000

𝑃 616,000
𝑃𝑟𝑒𝑑𝑒𝑡𝑒𝑟𝑚𝑖𝑛𝑒𝑑 𝐹𝑂𝐻 𝑅𝑎𝑡𝑒 = = 𝑃1.54/𝑢𝑛𝑖𝑡
400,000 𝑢𝑛𝑖𝑡𝑠
-------------------------------------------------------------------------------------------------------
Variable Cost per unit - P31.72
Fixed Cost per unit - 1.54
Total Cost per unit P33.26
Absorption, Variable and Throughput Costing 8

PRODUCT COST APPROACHES

Recap (Module 1):
Product Costs or Manufacturing Costs are costs associated with the production
activities of the company; materials, labor, and factory overhead.

Period Costs or Non-manufacturing Costs are costs associated with the functions
of selling and administration.
------------------------------------------------------------------------------------------------------------------------------------------
In preparing financial reports, costs can be accumulated and presented in different
ways. Choosing a cost accumulation method would determine which costs are to
be part of a product cost, and which costs are to be considered as period costs.

There are two methods to accomplish cost accumulation and cost

presentation procedures - ABSORPTION COSTING and VARIABLE
COSTING.

For managers, another alternative approach or method they use in

determining product costs is THROUGHPUT COSTING.
Absorption, Variable and Throughput Costing
PRODUCT COST APPROACHES
ABSORPTION COSTING
• also known as Full Costing
• must be used for external
financial statements and tax
returns
• treats the costs of all
manufacturing components as
inventoriable or product costs.
• treats non-manufacturing
component as period cost.
• treatment is a GAAP used by
management to save cost
VARIABLE COSTING
• also known as Direct Costing
• treats only the variable portion
of the product cost as product
cost (only DM, DL, and VOH
are part of product cost)
• treats fixed costs as period cost.
• treatment is non-GAAP and is
used by managers as an
alternative in determining
product cost and to evaluate
performance and for decision
making
9
THROUGHPUT COSTING
• also known as Supervariable
Costing
• also an alternative approach
used by managers in
determining product costs.
• treats only the direct materials
as product cost.
• all other costs are treated as
period costs.
• treatment is non-GAAP and
used by managers for shor
term capacity decisions
Absorption, Variable and Throughput Costing 10

PRODUCT COST APPROACHES

Additional Information:

Because absorption costing is a method for regulatory requirements

ABSORPTION COSTING
such as filing of income tax returns and filing of audited financial
• also known as Full Costing statements, this is usually the default costing approach. Consequentially,
• must be used for external since this is required approach in FS presentation this saves costs in
financial statements and tax producing another set of management reports.
returns
• treats the costs of all
manufacturing components as
inventoriable or product costs.
• treats non-manufacturing
component as period cost.
• treatment is a GAAP used by
management to save cost
Absorption, Variable and Throughput Costing 11

PRODUCT COST APPROACHES

Additional Information:

Because of internal organizational factors, managers believed that in

VARIABLE COSTING
order to evaluate performance, and for proper decisions making, only
• also known as Direct Costing variable costs affecting production should be properly separated from
• treats only the variable portion the fixed costs. The variable costing approach's justification is that the
of the product cost as product fixed factory overhead does not move together with the activity level
cost (only DM, DL, and VOH (units of production) and remains constant from period to period.
are part of product cost)
• treats fixed costs as period cost.
• treatment is non-GAAP and is
used by managers as an
alternative in determining
product cost and to evaluate
performance and for decision
making
Absorption, Variable and Throughput Costing
PRODUCT COST APPROACHES
THROUGHPUT COSTING
• also known as Supervariable
Costing
• also an alternative approach
used by managers in
determining product costs.
• treats only the direct materials
as product cost.
• all other costs are treated as
period costs.
• treatment is non-GAAP and
used by managers for shor
term capacity decisions
12
Additional Information:
A more realistic look at the three variable costs (direct materials, direct
labor, and variable overhead) will bring us to see that the variable
overhead is not always driven by the production level, and direct labor
may not always be driven by production level, as well, and may even
have some fixed components in some instances. The only cost that truly
varies with production level is direct materials, because, to simply put,
when more units are produced, more materials are needed, and this
cannot be exactly be the case for direct labor and variable factory
overhead.
Absorption, Variable and Throughput Costing 13

PRODUCT COST APPROACHES

ABSORPTION COSTING VARIABLE COSTING THROUGHPUT COSTING

• Product Costs • Product Costs • Product Costs
• Direct Materials • Direct Materials • Direct Materials
• Direct Labor • Direct Labor
• Variable Overhead • Variable Overhead • Period Costs
• Fixed Overhead • Direct Labor
• Period Costs • Variable Overhead
• Period Costs • Fixed Overhead • Fixed Overhead
• Variable Selling, Admin • Variable Selling, Admin • Variable Selling, Admin
and General Costs and General Costs and General Costs
• Fixed Selling, Admin and • Fixed Selling, Admin and • Fixed Selling, Admin and
General Costs General Costs General Costs
Absorption, Variable and Throughput Costing 14

ABSORPTION COSTING
Types of Costs Incurred Income Statement Presentation

Sales Revenue

Work in Finished
Product Costs Less:
Process Goods
DM, DL, VOH, FOH Cost of Goods Sold
Inventory Inventory

Gross Profit Margin

Period Costs Less:

Fixed and Variable Selling, Admin and
SG&A Expenses General Expenses

Earnings Before
Income Taxes
 ILLUSTRATION
Mark Lee Company produces alien eyeglasses with the following
information:

Sales price per unit - P60.00

Direct Materials per unit - 20.04
Direct Labor per unit - 10.50
Variable OH Cost per unit - 1.18

Budgeted Annual Fixed OH Cost - P616,000

Budgeted Annual Capacity in units - 400,000

What is the product cost per unit of the alien eyeglasses?

 ILLUSTRATION
Direct Materials per unit - 20.04
Direct Labor per unit - 10.50
Variable OH Cost per unit - 1.18
Total Variable Cost per unit P31.72
-------------------------------------------------------------------------------------------------------
Budgeted Annual Fixed OH Cost - P616,000
Budgeted Annual Capacity in units - 400,000

𝑃 616,000
𝑃𝑟𝑒𝑑𝑒𝑡𝑒𝑟𝑚𝑖𝑛𝑒𝑑 𝐹𝑂𝐻 𝑅𝑎𝑡𝑒 = = 𝑃1.54/𝑢𝑛𝑖𝑡
400,000 𝑢𝑛𝑖𝑡𝑠
-------------------------------------------------------------------------------------------------------
Variable Cost per unit - P31.72
Fixed Cost per unit - 1.54
Product Cost per unit P33.26
Absorption, Variable and Throughput Costing 17

VARIABLE COSTING
Types of Costs Incurred Income Statement Presentation

Sales Revenue

Work in Finished Less:

Product Costs
Process Goods Variable Cost of
DM, DL, VOH
Inventory Inventory Goods Sold

Product
Contribution Margin

Period Costs Less:

Variable SG&A Variable Non-
Expenses Manufacturing Costs

Total Contribution
Margin
Absorption, Variable and Throughput Costing 18

VARIABLE COSTING
Types of Costs Incurred Income Statement Presentation
Total Product
Contribution
Contribution
MarginMargin

Period Costs
Less:
FOH, Fixed SG&A
Fixed Costs
Expenses

Earnings Before
Income Taxes
 ILLUSTRATION
Mark Lee Company produces alien eyeglasses with the following
information:

Sales price per unit - P60.00

Direct Materials per unit - 20.04
Direct Labor per unit - 10.50
Variable OH Cost per unit - 1.18

Budgeted Annual Fixed OH Cost - P616,000

Budgeted Annual Capacity in units - 400,000

What is the product cost per unit of the alien eyeglasses?

 ILLUSTRATION
Direct Materials per unit - 20.04
Direct Labor per unit - 10.50
Variable OH Cost per unit - 1.18
Total Product Cost per unit P31.72

Fixed Overhead Cost is disregarded as it forms part of the

period cost.
Absorption, Variable and Throughput Costing 21

THROUGHPUT COSTING
Types of Costs Incurred Income Statement Presentation

Sales Revenue

Work in Finished Less:

Product Costs
Process Goods Cost of Goods Sold
DM
Inventory Inventory (Direct Materials)

Throughput Margin

Period Costs
DL, VOH, FOH, Less:
Fixed and Variable Other Costs
SG&A Expenses
Earnings Before
Income Taxes
 ILLUSTRATION
Mark Lee Company produces alien eyeglasses with the following
information:

Sales price per unit - P60.00

Direct Materials per unit - 20.04
Direct Labor per unit - 10.50
Variable OH Cost per unit - 1.18

Budgeted Annual Fixed OH Cost - P616,000

Budgeted Annual Capacity in units - 400,000

What is the product cost per unit of the alien eyeglasses?

 ILLUSTRATION
Direct Materials per unit - P20.04
Total Product Cost per unit P20.04

Product cost pertains to direct materials only.

Absorption, Variable and Throughput Costing 24

DIFFERENCES BETWEEN THE COSTING METHODS

• If units produced = units sold (no changes in inventory level)

• Earnings Before Income Taxes

• remains the same for Absorption, Variable and Throughput.

• If units produced > units sold (inventory level increased)

• Earnings Before Income Taxes

• Absorption Costing > Variable Costing > Throughput Costing

• If units produced < units sold (inventory level decreased)

• Earnings Before Income Taxes

• Absorption Costing < Variable Costing < Throughput Costing
Absorption, Variable and Throughput Costing 25

DIFFERENCES BETWEEN THE COSTING METHODS

• Regardless if more or less or the same units are produced compared to units sold

• Cost of Goods Sold

• Absorption Costing > Variable Costing > Throughput Costing

• Period Cost
• Absorption Costing < Variable Costing < Throughput Costing
Absorption, Variable and Throughput Costing 26

DIFFERENCES BETWEEN THE COSTING METHODS

Illustration:
Mark Lee Company produces alien eyeglasses with the following Assume the following scenarios:
information:
Scenario 1
Sales price per unit - P60.00 Units produced 400,000 units
Direct Materials per unit - 20.04 Units sold 400,000 units
Direct Labor per unit - 10.50
Variable OH Cost per unit - 1.18 Scenario 2
Units produced 390,000 units
Budgeted Annual Fixed OH Cost - P616,000 Units sold 370,000 units
Budgeted Annual Capacity in units - 400,000
Scenario 3
Budgeted nonproduction expenses: Units produced 410,000 units
Variable Selling Expense per unit - 1.24 Units sold 430,000 units
Fixed Selling and Administrative Expense - P23,400
 Absorption, Variable and Throughput Costing 27

DIFFERENCES BETWEEN THE COSTING METHODS

Illustration:

Absorption Costing Variable Costing Throughput Costing

Product Cost Period Cost Product Cost Period Cost Product Cost Period Cost
Direct Materials 20.04 per unit - 20.04 per unit - 20.04 per unit -
Direct Labor 10.50 per unit - 10.50 per unit - - 10.50 per unit
Variable Factory Overhead 1.18 per unit - 1.18 per unit - - 1.18 per unit
Fixed Factory Overhead 1.54 per unit - - 616,000.00 - 616,000.00
11.68 per unit
Total Cost 33.26 per unit - 31.72 per unit 616,000.00 20.04 per unit + 616,000
 Absorption, Variable and Throughput Costing 28

DIFFERENCES BETWEEN THE COSTING METHODS

Scenario 1
Absorption Costing Variable Costing Throughput Costing
Sales 400,000 x 60.00 24,000,000.00 400,000 x 60.00 24,000,000.00 400,000 x 60.00 24,000,000.00
Cost of Goods Sold (Product Costs) 400,000 x 33.26 - 13,304,000.00 400,000 x 31.72 - 12,688,000.00 400,000 x 20.04 - 8,016,000.00
Gross Margin 10,696,000.00
Product Contribution Margin 11,312,000.00
Throughput Margin 15,984,000.00
Variable Selling Expense 400,000 x 1.24 - 496,000.00
Total Contribution Margin 10,816,000.00
Period Costs
Direct Labor 400,000 x 10.50 - 4,200,000.00
Variable Factory Overhead 400,000 x 1.18 - 472,000.00
Fixed Factory Overhead - 616,000.00 - 616,000.00
Variable Selling Expense 400,000 x 1.24 - 496,000.00 400,000 x 1.24 - 496,000.00
Fixed Selling and Admin Expense - 23,400.00 - 23,400.00 - 23,400.00
Total Period Costs - 519,400.00 - 639,400.00 - 5,807,400.00
Earnings Before Income Taxes 10,176,600.00 10,176,600.00 10,176,600.00
 Absorption, Variable and Throughput Costing 29

DIFFERENCES BETWEEN THE COSTING METHODS

Scenario 2 Absorption Costing Variable Costing Throughput Costing
Sales 370,000 x 60.00 22,200,000.00 370,000 x 60.00 22,200,000.00 370,000 x 60.00 22,200,000.00
Cost of Goods Sold (Product Costs) 370,000 x 33.26 - 12,306,200.00 370,000 x 31.72 - 11,736,400.00 370,000 x 20.04 - 7,414,800.00
Gross Margin 9,893,800.00
Product Contribution Margin 10,463,600.00
Throughput Margin 14,785,200.00
Volume Variance (400,000 - 390,000) x 1.54 - 15,400.00
Variable Selling Expense 370,000 x 1.24 - 458,800.00
Adjusted Gross Margin 9,878,400.00
Total Contribution Margin 10,004,800.00
Period Costs
Direct Labor 390,000 x 10.50 - 4,095,000.00
Variable Factory Overhead 390,000 x 1.18 - 460,200.00
Fixed Factory Overhead - 616,000.00 - 616,000.00
Variable Selling Expense 370,000 x 1.24 - 458,800.00 370,000 x 1.24 - 458,800.00
Fixed Selling and Admin Expense - 23,400.00 - 23,400.00 - 23,400.00
Total Period Costs - 482,200.00 - 639,400.00 - 5,653,400.00
Earnings Before Income Taxes 9,396,200.00 9,365,400.00 9,131,800.00
 Absorption, Variable and Throughput Costing 30

DIFFERENCES BETWEEN THE COSTING METHODS

Scenario 3 Absorption Costing Variable Costing Throughput Costing
Sales 430,000 x 60.00 25,800,000.00 430,000 x 60.00 25,800,000.00 430,000 x 60.00 25,800,000.00
Cost of Goods Sold (Product Costs) 430,000 x 33.26 - 14,301,800.00 430,000 x 31.72 - 13,639,600.00 430,000 x 20.04 - 8,617,200.00
Gross Margin 11,498,200.00
Product Contribution Margin 12,160,400.00
Throughput Margin 17,182,800.00
Volume Variance (410,000 - 400,000) x 1.54 15,400.00
Variable Selling Expense 430,000 x 1.24 - 533,200.00
Adjusted Gross Margin 11,513,600.00
Total Contribution Margin 11,627,200.00
Period Costs
Direct Labor 410,000 x 10.50 - 4,305,000.00
Variable Factory Overhead 410,000 x 1.18 - 483,800.00
Fixed Factory Overhead - 616,000.00 - 616,000.00
Variable Selling Expense 430,000 x 1.24 - 533,200.00 430,000 x 1.24 - 533,200.00
Fixed Selling and Admin Expense - 23,400.00 - 23,400.00 - 23,400.00
Total Period Costs - 556,600.00 - 639,400.00 - 5,961,400.00
Earnings Before Income Taxes 10,957,000.00 10,987,800.00 11,221,400.00
 31

RECONCILING NET INCOME

ABSORPTION INCOME TO VARIABLE INCOME
Absorption Costing Net Income xxxx
Add: Fixed OH Portion released from Beginning Inventory xxxx
Less: Fixed OH Portion released from Ending Inventory (xxxx)
Variable Costing Net Income xxxx

VARIABLE INCOME TO THROUGHPUT INCOME

Variable Costing Net Income xxxx
Add: DL and VOH released from Beginning Inventory xxxx
Less: DL and VOH deferred in Ending Inventory (xxxx)
Throughput Costing Net Income xxxx
 32

RECONCILING NET INCOME

Using Scenario 2 of the previous illustration, reconcile the net income:

ABSORPTION INCOME TO VARIABLE INCOME

Absorption Costing Net Income 9,396,200.00
Add: Fixed OH Portion released from Beginning Inventory -
Less: Fixed OH Portion released from Ending Inventory 20,000 x 1.54 - 30,800.00
Variable Costing Net Income 9,365,400.00

VARIABLE INCOME TO THROUGHPUT INCOME

Variable Costing Net Income 9,365,400.00
Add: DL and VOH released from Beginning Inventory -
Less: DL and VOH deferred in Ending Inventory 20,000 x 11.68 - 233,600.00
Throughput Costing Net Income 9,131,800.00
 33

RECONCILING NET INCOME

Using Scenario 3 of the previous illustration, reconcile the net income:

ABSORPTION INCOME TO VARIABLE INCOME

Absorption Costing Net Income 10,957,000.00
Add: Fixed OH Portion released from Beginning Inventory 20,000 x 1.54 30,800.00
Less: Fixed OH Portion released from Ending Inventory -
Variable Costing Net Income 10,987,800.00

VARIABLE INCOME TO THROUGHPUT INCOME

Variable Costing Net Income 10,987,800.00
Add: DL and VOH released from Beginning Inventory 20,000 x 11.68 233,600.00
Less: DL and VOH deferred in Ending Inventory -
Throughput Costing Net Income 11,221,400.00
 34

EXAMPLE
Bunny Doyoung Corporation uses Required:
throughput costing, and began operations
at the start of the current year. Planned and • Compute the company's total cost for the year.
actual production equaled 20,000 units, • How much of this cost would be held in year-end
and sales totaled 17,500 units at P95 per inventory under (a) absorption costing, (b) variable
unit. Cost data for the year were as follows: costing, and (c) throughput costing?
• How much of the company's total cost for the year
Direct Materials per unit 18.00 would appear on the period's income statement
Conversion Cost: under (a) absorption costing, (b) variable costing,
Direct Labor 160,000 and (c) throughput costing?
Variable FOH 280,000 • Compute the year's net income under each costing
Fixed FOH 340,000 approach.
Selling and Admin Costs 430,000 • Prepare the reconciling schedule from absorption
costing to variable costing to throughput costing.
 35

EXAMPLE
• Compute the company's total cost for the year.

Product Cost:
Direct Materials (20,000 x 18.00) 360,000.00
Bunny Doyoung Corporation uses
throughput costing, and began operations Less: Ending Inventory (2,500 x 18.00) - 45,000.00
at the start of the current year. Planned and
Cost of Goods Sold 315,000.00
actual production equaled 20,000 units,
and sales totaled 17,500 units at P95 per Period Costs:
unit. Cost data for the year were as follows: Direct Labor 160,000.00
Direct Materials per unit 18.00 Variable Overhead Costs 280,000.00
Conversion Cost: Fixed Overhead Costs 340,000.00
Direct Labor 160,000
Variable FOH 280,000 Selling and Admin Expenses 430,000.00 1,210,000.00
Fixed FOH 340,000 Total Costs 1,525,000.00
Selling and Admin Costs 430,000
 36

EXAMPLE
• How much of this cost would be held in year-end inventory under
(a) absorption costing?

Absorption Costing
Bunny Doyoung Corporation uses Units Produced Unit Cost
throughput costing, and began operations Direct Materials (20,000 x 18.00) 360,000.00
at the start of the current year. Planned and
Direct Labor 160,000.00
actual production equaled 20,000 units,
Variable Overhead Costs 280,000.00
and sales totaled 17,500 units at P95 per
unit. Cost data for the year were as follows: Fixed Overhead Costs 340,000.00
Total Product Costs 1,140,000.00 20,000.00 57.00
Direct Materials per unit 18.00 Cost of Goods Sold - 997,500.00 17,500.00 57.00
Conversion Cost: Ending Inventory 142,500.00 2,500.00 57.00
Direct Labor 160,000
Variable FOH 280,000
Fixed FOH 340,000
Selling and Admin Costs 430,000
 37

EXAMPLE
• How much of this cost would be held in year-end inventory under
(b) variable costing?

Variable Costing
Bunny Doyoung Corporation uses Units Produced Unit Cost
throughput costing, and began operations Direct Materials (20,000 x 18.00) 360,000.00
at the start of the current year. Planned and Direct Labor 160,000.00
actual production equaled 20,000 units,
Variable Overhead Costs 280,000.00
and sales totaled 17,500 units at P95 per
Total Product Costs 800,000.00 20,000.00 40.00
unit. Cost data for the year were as follows:
Cost of Goods Sold - 700,000.00 17,500.00 40.00
Direct Materials per unit 18.00 Ending Inventory 100,000.00 2,500.00 40.00
Conversion Cost:
Direct Labor 160,000
Variable FOH 280,000
Fixed FOH 340,000
Selling and Admin Costs 430,000
 38

EXAMPLE
• How much of this cost would be held in year-end inventory under
(c) throughput costing?

Throughput Costing
Bunny Doyoung Corporation uses Units Produced Unit Cost
throughput costing, and began operations Direct Materials (20,000 x 18.00) 360,000.00
at the start of the current year. Planned and
Total Product Costs 360,000.00 20,000.00 18.00
actual production equaled 20,000 units,
Cost of Goods Sold - 315,000.00 17,500.00 18.00
and sales totaled 17,500 units at P95 per
unit. Cost data for the year were as follows: Ending Inventory 45,000.00 2,500.00 18.00

Direct Materials per unit 18.00

Conversion Cost:
Direct Labor 160,000
Variable FOH 280,000
Fixed FOH 340,000
Selling and Admin Costs 430,000
 39

EXAMPLE
• How much of the company's total cost for the year would appear on
the period's income statement under (a) absorption costing?

Cost of Goods Sold 997,500.00

Bunny Doyoung Corporation uses Selling and Admin Expenses 430,000.00
throughput costing, and began operations
at the start of the current year. Planned and Total Costs for the year 1,427,500.00
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 18.00

Conversion Cost:
Direct Labor 160,000
Variable FOH 280,000
Fixed FOH 340,000
Selling and Admin Costs 430,000
 40

EXAMPLE
• How much of the company's total cost for the year would appear on
the period's income statement under (b) variable costing?

Cost of Goods Sold 700,000.00

Bunny Doyoung Corporation uses Fixed Overhead Costs 340,000.00
throughput costing, and began operations
at the start of the current year. Planned and Selling and Admin Expenses 430,000.00
actual production equaled 20,000 units, Total Costs for the year 1,470,000.00
and sales totaled 17,500 units at P95 per
unit. Cost data for the year were as follows:

Direct Materials per unit 18.00

Conversion Cost:
Direct Labor 160,000
Variable FOH 280,000
Fixed FOH 340,000
Selling and Admin Costs 430,000
 41

EXAMPLE
• How much of the company's total cost for the year would appear on
the period's income statement under (c) throughput costing?

Cost of Goods Sold 315,000.00

Bunny Doyoung Corporation uses
Direct Labor 160,000.00
throughput costing, and began operations
at the start of the current year. Planned and Variable Overhead Costs 280,000.00
actual production equaled 20,000 units, Fixed Overhead Costs 340,000.00
and sales totaled 17,500 units at P95 per
Selling and Admin Expenses 430,000.00
unit. Cost data for the year were as follows:
Total Costs for the year 1,525,000.00
Direct Materials per unit 18.00
Conversion Cost:
Direct Labor 160,000
Variable FOH 280,000
Fixed FOH 340,000
Selling and Admin Costs 430,000
 42

EXAMPLE
• Compute the year's net income under each costing approach.

Absorption Costing
Sales 17,500 x 95.00 1,662,500.00
Bunny Doyoung Corporation uses
throughput costing, and began operations Cost of Goods Sold (Product Costs) 17,500 x 57.00 - 997,500.00
at the start of the current year. Planned and Gross Margin 665,000.00
actual production equaled 20,000 units, Period Costs
and sales totaled 17,500 units at P95 per Selling and Admin Expense - 430,000.00
unit. Cost data for the year were as follows:
Total Period Costs - 430,000.00
Direct Materials per unit 18.00 Earnings Before Income Taxes 235,000.00
Conversion Cost:
Direct Labor 160,000
Variable FOH 280,000
Fixed FOH 340,000
Selling and Admin Costs 430,000
 43

EXAMPLE
• Compute the year's net income under each costing approach.

Variable Costing

Bunny Doyoung Corporation uses Sales 17,500 x 95.00 1,662,500.00

throughput costing, and began operations Cost of Goods Sold (Product Costs) 17,500 x 40.00 - 700,000.00
at the start of the current year. Planned and
Product Contribution Margin 962,500.00
actual production equaled 20,000 units,
and sales totaled 17,500 units at P95 per Period Costs
unit. Cost data for the year were as follows: Fixed Factory Overhead - 340,000.00
Selling and Admin Expense - 430,000.00
Direct Materials per unit 18.00
Conversion Cost: Total Period Costs - 770,000.00
Direct Labor 160,000 Earnings Before Income Taxes 192,500.00
Variable FOH 280,000
Fixed FOH 340,000
Selling and Admin Costs 430,000
 44

EXAMPLE
• Compute the year's net income under each costing approach.

Throughput Costing

Bunny Doyoung Corporation uses Sales 17,500 x 95.00 1,662,500.00

throughput costing, and began operations Cost of Goods Sold (Product Costs) 17,500 x 18.00 - 315,000.00
at the start of the current year. Planned and
Throughput Margin 1,347,500.00
actual production equaled 20,000 units,
and sales totaled 17,500 units at P95 per Period Costs
unit. Cost data for the year were as follows: Direct Labor - 160,000.00
Variable Factory Overhead - 280,000.00
Direct Materials per unit 18.00
Conversion Cost: Fixed Factory Overhead - 340,000.00
Direct Labor 160,000 Selling and Admin Expense - 430,000.00
Variable FOH 280,000
Fixed FOH 340,000 Total Period Costs - 1,210,000.00
Selling and Admin Costs 430,000 Earnings Before Income Taxes 137,500.00
 45

EXAMPLE
• Prepare the reconciling schedule from absorption costing to variable
costing to throughput costing.

Absorption Costing Net Income 235,000.00

Bunny Doyoung Corporation uses
Add: Fixed OH Portion released from Beginning Inventory -
throughput costing, and began operations
Less: Fixed OH Portion released from Ending Inventory 2,500 x 17.00 - 42,500.00
at the start of the current year. Planned and
actual production equaled 20,000 units, Variable Costing Net Income 192,500.00
and sales totaled 17,500 units at P95 per
unit. Cost data for the year were as follows: Variable Costing Net Income 192,500.00
Add: DL and VOH released from Beginning Inventory -
Direct Materials per unit 18.00
Less: DL and VOH deferred in Ending Inventory 2,500 x 22.00 - 55,000.00
Conversion Cost:
Throughput Costing Net Income 137,500.00
Direct Labor 160,000
Variable FOH 280,000
Fixed FOH 340,000
Selling and Admin Costs 430,000
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