7: Variable and Absorption Costing

Last updated
Save as PDF

Page ID: 65730

Lumen Learning
Lumen Learning

$ \newcommand{\vecs}[1]{\overset { \scriptstyle \rightharpoonup} {\mathbf{#1}} } $

$ \newcommand{\vecd}[1]{\overset{-\!-\!\rightharpoonup}{\vphantom{a}\smash {#1}}} $

$ \newcommand{\id}{\mathrm{id}}$ $ \newcommand{\Span}{\mathrm{span}}$

( \newcommand{\kernel}{\mathrm{null}\,}\) $ \newcommand{\range}{\mathrm{range}\,}$

$ \newcommand{\RealPart}{\mathrm{Re}}$ $ \newcommand{\ImaginaryPart}{\mathrm{Im}}$

$ \newcommand{\Argument}{\mathrm{Arg}}$ $ \newcommand{\norm}[1]{\| #1 \|}$

$ \newcommand{\inner}[2]{\langle #1, #2 \rangle}$

$ \newcommand{\Span}{\mathrm{span}}$

$ \newcommand{\id}{\mathrm{id}}$

$ \newcommand{\Span}{\mathrm{span}}$

$ \newcommand{\kernel}{\mathrm{null}\,}$

$ \newcommand{\range}{\mathrm{range}\,}$

$ \newcommand{\RealPart}{\mathrm{Re}}$

$ \newcommand{\ImaginaryPart}{\mathrm{Im}}$

$ \newcommand{\Argument}{\mathrm{Arg}}$

$ \newcommand{\norm}[1]{\| #1 \|}$

$ \newcommand{\inner}[2]{\langle #1, #2 \rangle}$

$ \newcommand{\Span}{\mathrm{span}}$ $ \newcommand{\AA}{\unicode[.8,0]{x212B}}$

$ \newcommand{\vectorA}[1]{\vec{#1}} % arrow$

$ \newcommand{\vectorAt}[1]{\vec{\text{#1}}} % arrow$

$ \newcommand{\vectorB}[1]{\overset { \scriptstyle \rightharpoonup} {\mathbf{#1}} } $

$ \newcommand{\vectorC}[1]{\textbf{#1}} $

$ \newcommand{\vectorD}[1]{\overrightarrow{#1}} $

$ \newcommand{\vectorDt}[1]{\overrightarrow{\text{#1}}} $

$ \newcommand{\vectE}[1]{\overset{-\!-\!\rightharpoonup}{\vphantom{a}\smash{\mathbf {#1}}}} $

$ \newcommand{\vecs}[1]{\overset { \scriptstyle \rightharpoonup} {\mathbf{#1}} } $

$ \newcommand{\vecd}[1]{\overset{-\!-\!\rightharpoonup}{\vphantom{a}\smash {#1}}} $

$\newcommand{\avec}{\mathbf a}$ $\newcommand{\bvec}{\mathbf b}$ $\newcommand{\cvec}{\mathbf c}$ $\newcommand{\dvec}{\mathbf d}$ $\newcommand{\dtil}{\widetilde{\mathbf d}}$ $\newcommand{\evec}{\mathbf e}$ $\newcommand{\fvec}{\mathbf f}$ $\newcommand{\nvec}{\mathbf n}$ $\newcommand{\pvec}{\mathbf p}$ $\newcommand{\qvec}{\mathbf q}$ $\newcommand{\svec}{\mathbf s}$ $\newcommand{\tvec}{\mathbf t}$ $\newcommand{\uvec}{\mathbf u}$ $\newcommand{\vvec}{\mathbf v}$ $\newcommand{\wvec}{\mathbf w}$ $\newcommand{\xvec}{\mathbf x}$ $\newcommand{\yvec}{\mathbf y}$ $\newcommand{\zvec}{\mathbf z}$ $\newcommand{\rvec}{\mathbf r}$ $\newcommand{\mvec}{\mathbf m}$ $\newcommand{\zerovec}{\mathbf 0}$ $\newcommand{\onevec}{\mathbf 1}$ $\newcommand{\real}{\mathbb R}$ $\newcommand{\twovec}[2]{\left[\begin{array}{r}#1 \\ #2 \end{array}\right]}$ $\newcommand{\ctwovec}[2]{\left[\begin{array}{c}#1 \\ #2 \end{array}\right]}$ $\newcommand{\threevec}[3]{\left[\begin{array}{r}#1 \\ #2 \\ #3 \end{array}\right]}$ $\newcommand{\cthreevec}[3]{\left[\begin{array}{c}#1 \\ #2 \\ #3 \end{array}\right]}$ $\newcommand{\fourvec}[4]{\left[\begin{array}{r}#1 \\ #2 \\ #3 \\ #4 \end{array}\right]}$ $\newcommand{\cfourvec}[4]{\left[\begin{array}{c}#1 \\ #2 \\ #3 \\ #4 \end{array}\right]}$ $\newcommand{\fivevec}[5]{\left[\begin{array}{r}#1 \\ #2 \\ #3 \\ #4 \\ #5 \\ \end{array}\right]}$ $\newcommand{\cfivevec}[5]{\left[\begin{array}{c}#1 \\ #2 \\ #3 \\ #4 \\ #5 \\ \end{array}\right]}$ $\newcommand{\mattwo}[4]{\left[\begin{array}{rr}#1 \amp #2 \\ #3 \amp #4 \\ \end{array}\right]}$ $\newcommand{\laspan}[1]{\text{Span}\{#1\}}$ $\newcommand{\bcal}{\cal B}$ $\newcommand{\ccal}{\cal C}$ $\newcommand{\scal}{\cal S}$ $\newcommand{\wcal}{\cal W}$ $\newcommand{\ecal}{\cal E}$ $\newcommand{\coords}[2]{\left\{#1\right\}_{#2}}$ $\newcommand{\gray}[1]{\color{gray}{#1}}$ $\newcommand{\lgray}[1]{\color{lightgray}{#1}}$ $\newcommand{\rank}{\operatorname{rank}}$ $\newcommand{\row}{\text{Row}}$ $\newcommand{\col}{\text{Col}}$ $\renewcommand{\row}{\text{Row}}$ $\newcommand{\nul}{\text{Nul}}$ $\newcommand{\var}{\text{Var}}$ $\newcommand{\corr}{\text{corr}}$ $\newcommand{\len}[1]{\left|#1\right|}$ $\newcommand{\bbar}{\overline{\bvec}}$ $\newcommand{\bhat}{\widehat{\bvec}}$ $\newcommand{\bperp}{\bvec^\perp}$ $\newcommand{\xhat}{\widehat{\xvec}}$ $\newcommand{\vhat}{\widehat{\vvec}}$ $\newcommand{\uhat}{\widehat{\uvec}}$ $\newcommand{\what}{\widehat{\wvec}}$ $\newcommand{\Sighat}{\widehat{\Sigma}}$ $\newcommand{\lt}{<}$ $\newcommand{\gt}{>}$ $\newcommand{\amp}{&}$ $\definecolor{fillinmathshade}{gray}{0.9}$

7.1: Chapter 6 Study Plan
This page outlines a study plan on variable costing and performance reporting, defining key terms like absorption costing and contribution margin. Students will learn to identify cost types, differentiate between costing methods, and analyze net income variance. Skills developed include calculating unit costs and preparing income statements, including segmented ones, with a printable resource for additional study.
7.2: The Role of Standard Costs in Management
This page discusses standard costs, which are predetermined measures for setting performance goals and budgets based on estimated costs for materials, labor, and overhead. Management uses these comparisons to identify variances and focus on discrepancies. Standards can be ideal or practical, with practical standards being more common. Standard costs aid in performance evaluation and determining selling prices to achieve income goals.
7.3: Calculations for Direct Materials and Labor
This page explains standard costs as benchmarks for manufacturing expenses, with variances highlighting differences between actual and standard costs. It covers favorable and unfavorable variances, along with specific analyses for materials and labor. The discussion includes labor efficiency variance, detailing calculation methods and an example from Beta Company that shows a $2,000 unfavorable variance due to excess labor hours.
7.4: Calculations for Overhead
This page explains Beta Company's overhead cost management using a standard costing system and flexible budgeting. With 11,000 units produced, Beta incurred $108,000 in overhead, resulting in unfavorable variances: $2,000 for variable overhead spending, $4,000 for efficiency, and $2,000 for fixed overhead, totaling an $8,000 unfavorable variance. The variances indicate higher costs than predicted due to excess machine hours and fixed costs exceeding budgeted expectations.
7.5: Advantages and Disadvantages of Standard Costing
This page discusses the advantages and disadvantages of using standard costs in business. Advantages include better cost control, improved decision-making, easier inventory assessments, lower record-keeping expenses, and possible production cost reductions. Disadvantages involve disputed materiality limits, the risk of omitting variances, and potential low employee morale due to perceived neglect of their contributions.
7.6: Chapter 6 Key Points
This page compares Absorption Costing and Variable Costing in accounting. Absorption Costing includes all manufacturing costs, potentially creating misleading financial reports, while Variable Costing focuses only on variable costs for clearer decision-making and treats fixed costs as period expenses. The income statements differ, with Absorption Costing showing gross margin and Variable Costing highlighting contribution margin.
7.7: Variance Summary
This page discusses six key accounting variances: materials price and usage, labor rate and efficiency, variable overhead spending and efficiency, and fixed overhead variance. Variances are categorized as favorable or unfavorable based on comparisons with standards. It also examines the impact of rising chocolate prices on Hershey's direct material variances, suggesting a need for standard revisions.
7.8: Accounting in the Headlines
This page discusses PEZ Candy Inc.'s challenges with rising costs primarily due to increased sugar prices and labor expenses. The company plans to raise prices in 2015, influenced by tariffs on Mexican sugar and higher minimum wages. Adjustments to cost standards are necessary to address these changes, as unadjusted variances for sugar and labor will require departmental explanations. This situation will impact PEZ's pricing strategies and financial performance significantly.
7.9: Chapter 6- Exercises (REVISE and ADD problems)
This page covers absorption and variable costing methods, highlighting their definitions, differences, and contexts for use in financial reporting. It explains situations where net income is higher under variable costing versus absorption costing, with detailed reasons for these differences. Exercises for Socks Company and Costner Company include preparing income statements for both costing methods and calculating production costs.

Search

Text Color

Text Size

Margin Size

Font Type