Accounting for Decision Making

Absorption and Variable Costing

Contribution Margin Income Statement

For the Quarter Ended March 31, 2013

Sales



(25000*100)[w1]

$25,00,000

less:

Variable Expenses

Variable cost of goods sold

Beginning inventory

$0 add:

Variable manufacturing overhead

(25000*48) [w2]

$1,200,000

goods available for sale

$1,200,000 less:

ending inventory

$0

variable cost of goods sold

$1,200,000 add:

selling and admin expense

$350,000

$1,550,000

Contribution Margin

(2500000-1550000)

$950,000 less:

fixed expense:

fixed manufacturing overhead

$600,000

Net Income

(950000-600000)

$350,000

Difference between absorption and variable costing

In absorption costing, all cost of production is included as product cost regardless whether, they are variable costs or fixed costs. Under absorption costing system, direct labor, direct material, variable overhead and fixed overhead costs are included as unit cost of the product. In absorption costing income statement, a portion of fixed manufacturing overhead cost is allocated along with variable manufacturing overhead cost because all cost of production cost is included as product cost under absorption costing or full costing method. On the other hand, under variable costing, fixed manufacturing overhead are excluded in inventoriable products cost hence under variable costing system the value of inventory is lesser. (Drury, 2007).

Contribution Margin Income Statement

For the quarter ending June 31, 2013

Sales



(25000*100)

$25,00,000

less:

Variable Expenses

Variable cost of goods sold

Beginning inventory

$0 add:

Variable manufacturing overhead

(50000*48)

$2,400,000

goods available for sale

$2,400,000 less:

ending inventory

(25000*48)

$1,200,000

variable cost of goods sold

$1,200,000 add:

selling and admin expense

$350,000

$1,550,000

Contribution Margin

(2500000-1550000)

$950,000 less:

fixed expense:

fixed manufacturing overhead

$600,000

Net Income

(950000-600000)

$350,000

Absorption Costing Income Statement

For the quarter ended June 31, 2013

Sales

(25000*100)

$2,500,000 less:

Cost of goods sold

Beginning Inventory

0

add:

cost of goods manufactured

(50000*48+600000)

$3,000,000

goods available for sale

$3,000,000 less:

ending inventory

(25000*48+600000/50000*25000)

$1,500,000

cost of goods sold

$1,500,000

gross margin

(2500000-1500000)

$1,000,000 less:

selling and admin expense

$350,000

Net income

(1000000-350000)

$650,000

Calculations:

[w1] Selling Price = Sales/Number of units

=2500000/25000

=100

COGS = Variable Cost + Fixed Cost

1800000-600000=Variable Cost

1200000=Variable cost

[w2] Variable Cost per unit= Variable Cost/Number of units

= 1200000/25000

= 48 per unit

Fixed Manufacturing overhead cost per unit= Fixed manufacturing cost/Number of units

= 600000/25000

= 24 per ...