XVI.Module+20000+Formulas

__**Variable Costing Income Statement versus Absorption Costing Income Statement**__ Format for Variable Costing Income Statement is a follows:

Less: Variable cost of goods sold Variable selling expenses Contribution margin Less: Fixed overhead Fixed selling expenses Operatin income ||> XXX
 * Sales

(XXX) __(XXX)__ XXXX

(XXX) __(XXX)__ __XXX__ ||

Format for Absorption Costing Income Statement is as follows:

Less: Cost of goods sold Gross Profit Less: Selling expenses Operating income ||> XXX __(XXX)__ XXX __(XXX)__ __XXX__ ||
 * Sales

Explanation for differences (taken from [] ):

These methods differ only in how they treat fixed manufacturing overhead costs.

1) **Variable Costing.** Variable costing includes only variable production costs in product costs. Direct materials, direct labor and manufacturing overhead would ordinarily be included in product costs under variable costing. Fixed manufacturing overhead is not treated as a product cost under this method. Rather, fixed manufacturing overhead is treated as a period cost and is charged against income each period.

2) **Absorption Costing.** Absorption costing treats //all// production costs as product costs, regardless of whether they are variable or fixed. Under absorption costing, a portion of fixed manufacturing overhead is allocated to each unit of product.

1) **Deferral of fixed manufacturing costs under absorption costing.** Under absorption costing, if inventories increase then a portion of the fixed manufacturing overhead costs of the current period is deferred to future periods in the inventory account. When the units are later taken out of the inventory and sold, the deferred fixed costs flow through to the income statement as part of cost of goods sold
 * Comparison of Absorption and Variable Costing**

2) **Differences in inventorties under the two methods.** The ending inventory figures under the variable costing and absorption costing methods are different. Under variable costing, only the variable manufacturing costs are included in inventory. Under absorption costing, both variable and fixed manufacturing costs are included in inventory.

3) **Suitability for CVP analysis.** An absorption costing income statement is not well suited for providing data for CVP computations since it makes no distinction between fixed and variable costs. In contrast, the variable costing method classifies costs by behavior and is very useful in setting-up CVP computations.