1

Chapter 15
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Variable
Variable costing
costing
assigns
assigns only
only variable
variable
manufacturing
manufacturing costs
costs to
to
the
the product.
product.
Direct materials
Direct labor
Variable overhead
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Absorption
Absorption costing
costing assigns
assigns
all
all manufacturing
manufacturing costs
costs to
to
the
the product;
product; this
this adds
adds fixed
fixed
overhead
overhead to
to the
the formula.
formula.
Direct materials
Direct labor
Variable overhead
Fixed overhead
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Inventory Valuation
Units in beginning inventory ---
Units produced 10,000
Units sold ($300 each) 8,000
Normal volume 10,000

Variable
Fixed cost per unit:
costs:

Direct overhead
Fixed materials

$ 50
$250,000
Direct selling
Fixed labor and administrative
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Unit
Unit Cost
Cost
Variable Absorption
costing costing
Direct materials $ 50 $ 50
Direct labor 100 100
Variable overhead 50 50
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Unit
Unit Cost
Cost
Variable Absorption
costing costing
Direct materials $ 50 $ 50
Direct labor 100 100
Variable overhead 50 50
Fixed overhead 25
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Unit
Unit Cost
Cost
Variable Absorption
costing costing
Direct materials $ 50 $ 50
Direct labor 100 100
Variable overhead 50 50
Fixed overhead 25

$250,000
$250,000
10,000
10,000
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Unit
Unit Cost
Cost
Variable Absorption
costing costing
Direct materials $ 50 $ 50
Direct labor 100 100
Variable overhead 50 50
Fixed overhead 25
Total $200 $225
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Fairchild Company
Variable-Costing Income Statement
Sales $2,400,000
Less variable expenses:
Variable cost of goods sold $1,600,000
Variable selling and admin. 80,000 1,680,000
Contribution margin $ 720,000
Less fixed expenses:
Fixed overhead $ 250,000
Fixed selling and admin. 150,000 350,000
Net income $ 370,000
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Fairchild Company
Absorption-Costing Income Statement
Sales $2,400,000
Less: Cost of goods sold 1,800,000
Gross margin $ 600,000
Less: Selling and administrative exp. 180,000
Net income $ 420,000

Variable costing net income $370,000

Fixed portion of ending inventory
(2,000 units x $25) 50,000
Absorption costing net income $420,000
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The
The End
End