COSTING METHODS:

- VARIABLE (DIRECT) - ABSORPTION

VARIABLE COSTING METHOD AND ABSORPTION COSTING METHOD

HISTORICAL ORIGINS:
INDUSTRIALIZATION AGE:
Only two costs were known, the material and direct labor, and also were known as prime costs.

INVESTMENT EXPANSION:
Emerging manufacturing overhead costs.

THIRTY YEARS:
Surge an alternative to absorption costing method, called VARIABLE COSTING or DIRECT COSTING.

VARIABLE COSTING METHOD AND ABSORPTION COSTING METHOD

VARIABLE COSTING: It only takes into account the variable cost of a product. ABSORPTION COSTING: This method includes all cost of the production, variable and fixed costs.

VARIABLE COSTING METHOD AND ABSORPTION COSTING METHOD

DIFFERENCES BETWEEN VARIABLE COSTING AND ABSORPTION COSTING

VARIABLE COSTING (DIRECT) Takes as a total, fixed manufacturing overhead. Considers only variable costs for valuing inventories It is presented in the Income Statement using the contribution margin

ABSORPTION COSTING Fixed cost is distributed among the units produced by a predetermined rate For valuing inventories considered both variable and fixed costs It is presented in the Income Statement in a traditional format.

VARIABLE COSTING METHOD AND ABSORPTION COSTING METHOD

DIFFERENCES BETWEEN VARIABLE COSTING AND ABSORPTION COSTING VARIABLE COSTING Applies cost-volume-profit model

ABSORPTION COSTING Consider the variation in capacity to determine the cost of goods sold.

VARIABLE COSTING METHOD AND ABSORPTION COSTING METHOD

The increase in profits lead to:
Higher net operating income in variable costing if sales volume is greater than production. In the absorption, production and inventories decrease. In the absorption, net operating income will be higher if volume sales is less than production. For variable costing, production and inventories increase. In both methods have equal profit when the sales volume is the same to production volume.

VARIABLE COSTING METHOD AND ABSORPTION COSTING METHOD

ADVANTAGES OF VARIABLE COSTING
Facilitates planning, using cost-volume-profit model. Facilitates to management to identify critical areas. Marginal analysis of the different product lines, helps management to choose the optimal composition. Marginal analysis of product lines helps to determine which of them should be supported and which eliminated. Marginal analysis of product lines helps to assess options for price reductions, discounts, advertising campaigns, etc.

VARIABLE COSTING METHOD AND ABSORPTION COSTING METHOD

ADVANTAGES OF VARIABLE COSTING
Eliminate fluctuations in costs. Substantial framework to take advantage of special orders at lower prices. Because it can lower prices obtained by the contribution margin, it is vital for decision making. Eliminates the problem of choosing bases for allocating fixed costs. Facilitates the rapid valuation of inventories. Provides a better cash budget.

VARIABLE COSTING METHOD AND ABSORPTION COSTING METHOD

DISADVANTAGES:
Problems in the separation of fixed and variable costs. The use of margin analysis can be detrimental to short-term pricing.

Income Statement Absorption costing

SALES -COST OF GOODS SOLD (COGS):
Goods Beginning inventory of finished product available for sale + Cost of goods manufactured - Ending inventory of finished product +/- Adjustment for variation in capacity +/- Other variations

=GROSS MARGIN - Selling and admin. Expenses:

Fixed Variable

= NET OPERATING INCOME

Absorption costing
MANUFACTURING OVERHEAD FIXED RATE=
Fixed Manufacturing Overhead Normal capacity

VARIATION IN CAPACITY ($)=

(Normal capacity Real production) * Fixed M.O. rate

NET OPERATING INCOMES RECONCILIATION=

(Beginning inventory Ending inventory)* Fixed M.O. rate

Income Statement Variable Costing

SALES -VARIABLE EXPENSES: Beginning inventory of finished product
(variable) (variable)
Goods available for sale

Cost of goods manufactured (COGM)

- Ending inventory of finished product (variable) +/- Other variations = Variable cost of goods sold + Variable selling and administrative expenses =CONTRIBUTION MARGIN - FIXED EXPENSES:
Manufacturing overhead Selling and administrative expenses