13-1

Standard Costing,
Variable Costing,
and Throughput
Costing
Prepared
Preparedby
by

Douglas
DouglasCloud
Cloud

Pepperdine
PepperdineUniversity
University

13

13-2

Objectives
Objectives
Describe standard costing and explain why it
After
reading
this
After
reading
this
is the predominant costing method.
chapter,
you
should
chapter,
you
should rates and
Develop standard
fixed overhead
be
able
to:
be
able
to:
apply fixed overhead to products.
Prepare standard absorption costing income
statement.
Compare, contrast, and distinguish actual,
normal, and standard costing.
Continued
Continued

13-3

Objectives
Objectives
Explain why variable costing offers
advantages over absorption costing for internal
reporting purposes.
Prepare variable costing income statements.
Describe throughput costing and prepare
income statements.

13-4

Standard
Standard Absorption
Absorption Costing
Costing
Under
Under standard
standard costing
costing
inventories
inventories appear
appear at
at standard
standard
cost,
cost, not
not actual
actual or
ornormal
normal cost.
cost.

13-5

Standard
Standard Absorption
Absorption Costing
Costing
An
An important
important reason
reason for
for using
using
standard
standard costing
costing isis that
that itit integrates
integrates
standard
standard costs
costs and
and variances
variances into
into
the
the companys
companysrecord.
record.

13-6

SMP Company, Operating Data 20X1

Production in units
110,000
Sales in units, at $80 each
90,000
Ending inventory in units
20,000
Actual production costs:
Variable
$2,255,000
Fixed
$3,200,000
Selling and administrative expenses:
Variable at $5 per unit
$450,000
Fixed
$1,400,000
Standards and budgets:
Budgeted fixed production costs
$3,000,000
Standard variable production costs
$20 per unit

13-7

Calculating
Calculating A
AStandard
Standard Fixed
Fixed Cost
Cost
The standard fixed cost per unit depends on two
things:
(1) The choice of a measure of activity (e.g.,
direct labor hours, machine hours, setup time
etc.).
(2) A level of activity.

13-8

Calculating
Calculating A
AStandard
Standard Fixed
Fixed Cost
Cost
Normal
Normal activity
activity isis the
the
Theoretical
activity
Theoretical
activity
average
average activity
activity
isis the
absolute
the
absolute
expected
or
budgeted
expected or budgeted
Practical
isis
Practical activity
activity
maximum
that
aa
maximum
that
over
over the
the coming
coming two
two
the
the maximum
maximum
plant
can
produce,
plant
can
produce,
to
five
years.
to five years.
activity
activity the
the company
company
with
with no
no interruptions
interruptions
can
can achieve
achieve given
given
or
or problems
problems at
at all.
all.
the
the usual
usual kinds
kinds of
of
interruptions.
interruptions.

13-9

Calculating
Calculating A
AStandard
Standard Fixed
Fixed Cost
Cost
SMPs management decides to set the standard perunit fixed cost using normal capacity of 100,000 units.
Budgeted fixed production costs
Standard fixed
=
cost per unit
Level of activity
=

$3,000,000
100,000

= $30 per unit

13-10

Variances
Variances
Total actual variable production
cost (for source of data, turn
click on button below)

$2,255,000

Standard variable costs

(110,000 x $20)
Unfavorable variable cost variances

2,200,000
$

55,000

13-11

Variances
Variances
Total actual fixed overhead

$3,200,000

Fixed overhead applied

(110,000 x $30)

3,300,000

Overapplied overhead

$ 100,000

13-12

Variances
Variances
Budgeted
fixed
overhead

Applied
fixed
overhead

$3,000,000
(110,000 x $30)

$3,300,000

Actual fixed
overhead
$3,200,000

$300,000 F

$200,000 U

Budget variance

Volume variance

$100,000 F

Overapplied overhead

13-13

SMP
SMP Company,
Company, Fixed
Fixed Overhead,
Overhead, 20X1
20X1
Applied at 110,000 units
$3,300,000
$3,200,000
$3,000,000

Dollars

Volume Variance
$300,00 F

Budget variance, $200,000 U

Volume Variance
$300,00 F

Budget
Actual
$3,200,000

Applied, $30 x units produced

100,000

Production in Units

110,000

13-14

SMP
SMP Company,
Company, Income
Income
Statement
Statement for
for 20X1
20X1
Sales
Standard cost of sales:
Beginning inventory
Standard variable production costs
Applied fixed production costs
Cost of goods available for sale
Ending inventory
Standard cost of sales
Standard gross margin

Continued
Continued

$7,200,000
$

0
2,200,000
3,300,000
$5,500,000
1,000,000
4,500,000
$2,700,000

13-15
Standard gross margin
$2,700,000
Variances:
Fixed manufacturing cost budget
variance
$200,000 U
Fixed manufacturing cost volume
variance
300,000 F
Variable manufacturing cost variance
55,000 U
45,000 F
Actual gross margin
$2,745,000
Selling and administrative expenses
1,850,000
Profit
$ 895,000

13-16

SMP
SMP Company,
Company, Income
Income
Statement
Statement for
for 20X1
20X1
Sales
Cost of sales:
Standard cost of sales
$4,500,000
Variances:
Fixed manufacturing cost budget variance
200,000 U
Fixed manufacturing cost volume variance
300,000 F
Variable manufacturing cost variances
55,000 U
Cost of sales
Gross margin
Selling and administrative expenses
Profit

Alternative Format

$7,200,000

4,455,000
$2,745,000
1,850,000
$ 895,000

Review
Review Problem
Problem

13-17

SMP, 20X2
Production, in units
Sales, in units, at $80 each
Ending inventory, in units
Actual production costs:
Variable
Fixed
Selling and administrative expenses:
Variable at $5 per unit
Fixed
Standard variable production cost (per unit)
Budgeted fixed production costs

95,000
100,000
15,000
$1,881,000
$2,950,000
$ 50,000
$1,400,000
$20
$3,000,000

SMP
SMP Company,
Company, Income
Income
Statement
Statement for
for 20X1
20X1

13-18

Sales
$8,000,000
Standard cost of sales:
Beginning inventory
$1,000,000
Standard variable production costs
1,900,000
Applied fixed production costs
2,850,000
Cost of goods available for sale
$5,750,000
Ending inventory
750,000
Standard cost of sales
$5,000,000
Variances:
Fixed mfg. cost budget variance
50,000 F
Fixed mfg. cost volumeContinued
variance
150,000 U
Continued
Variable mfg. cost variances
19,000 F

13-19
Sales (100,000 x $80)
Cost of sales
Gross margin
Selling and administrative expenses
Profit

$8,000,000
5,081,000
$2,919,000
1,900,000
$1,019,000

Variances:
Variable cost: $1,881,000 ($20 x 95,000) =
$19,000 F

13-20

SMP
SMP Company
Company Example
Example
Actual fixed
overhead

Budgeted
fixed
overhead

Applied
fixed
overhead

$2,950,000

$3,000,000

( 95,000 x $30)
$2,850,000
$150,000 U

$50,000 F

Budget variance

Volume variance
$100,000

Total fixed overhead variances

13-21

Multiple
Multiple Products
Products and
and
Activity-Based
Activity-Based Costing
Costing
ARG Company
Portable Model

Standard direct labor hours

Number of component parts
Budgeted production
Total budgeted use of
components

Table Model

8
100
6,000

12
200
2,000

600,000

400,000

Standard fixed overhead rate per component

($500,000/(600,000 + 400,000) = $0.50

13-22

Multiple
Multiple Products
Products and
and
Activity-Based
Activity-Based Costing
Costing
ARG Company
Portable Model

Material related:
Portable model ($100 x $0.50)
Table model (200 x $0.50)
Direct labor-related:
Portable model (8 hours x $4)
Table model (12 hours x $4)
Standard fixed overhead cost
per unit

Table Model

$50
$100
32
48
$82

$148

13-23

ARG
ARG Company
Company Example
Example
Actual Cost

Budgeted
Cost

$510,000

$500,000

Applied
Cost
$550,000
$50,000 F

$10,000 U

Budget variance

Volume variance
$40,000

Total overapplied overhead

13-24

Comparison
Comparison of
of Standard
Standard and
and
Normal
Normal Costing
Costing
Manufacturing Costs
Direct
Materials

Direct
Labor

Overhead

Actual cost system

Actual

Actual

Actual

Normal cost system

Actual

Actual

Applied

Standard cost system

Standard

Standard

Standard

13-25

Variable
Variable Costing
Costing
Variable costing
excludes fixed
production costs from
the unit costs of
inventories, and treats all
fixed costs as expenses
in the period incurred.

13-26

Flow of Costs in a Manufacturing Firm

Materials
Inventory
Direct
Labor
Variable
Manufacturing
Overhead
Fixed
Manufacturing
Overhead

Work in
Process
Inventory

Finished
Goods
Inventory

Cost of
Goods
Sold on
income
statement

Absorption
costing
Expense
on income
statement

SMP
SMP Company,
Company, Income
Income Statement
Statement for
for
20X1Actual
20X1Actual Variable
Variable Costing
Costing

13-27

Sales
$7,200,000
Variable cost of sales:
Beginning inventory
$
0
Actual variable production costs
2,255,000
Cost of goods available for sale
$2,255,000
Ending inventory
410,000
Variable cost of sales
1,845,000
Variable manufacturing margin
$5,355,000
Variable selling and administrative exp.
450,000
Contribution margin
$4,905,000
Actual fixed costs
4,600,000
Profit
$ 305,000

SMP
SMP Company,
Company, Income
Income Statement
Statement for
for
20X2Actual
20X2Actual Variable
Variable Costing
Costing

13-28

Sales
$8,000,000
Variable cost of sales:
Beginning inventory
$ 410,000
Actual variable production costs
1,881,000
Cost of goods available for sale
$2,291,000
Ending inventory
297,000
Variable cost of sales
1,994,000
Variable manufacturing margin
$6,006,000
Variable selling and administrative exp.
500,000
Contribution margin
$5,506,000
Actual fixed costs
4,350,000
Profit
$ 1,156,000

13-29

SMP
SMP Company,
Company, Standard
Standard Variable
Variable
Costing
Costing Income
Income Statement
Statement for
for 20x2
20x2
Sales

$8,000,000

Variable standard cost of goods sold

2,000,000

Standard variable manufacturing margin

$6,000,000

Variable manufacturing cost variances

19,000

Variable manufacturing margin

$6,019,500

Variable selling and administrative

500,000

Contribution margin

$5,519,000

Actual fixed costs:

Budgeted fixed mfg. costs
Fixed mfg. cost budget variance
Selling and administrative
Profit

$3,000,000
$50,000
1,400,000 4,350,000
F
$1,169,500

13-30

Reconciliation
Reconciliation of
of IncomesVariable
IncomesVariable
and
and Absorption
Absorption Costing
Costing
20x1
Variable costing net income
Absorption costing net income
Difference to be explained
Explanation of income differences:
Fixed production costs-beg. inventory
Fixed production costs during year
$3,200,000
Less fixed production costs-end. inventory
Total fixed costs expensedabsorption costing
Total fixed costs expensedvariable costing
Difference in incomes

20x2
$ 295,000$1,169,000
895,000
1,019,000
$ (600,000) $ 150,000

0$ 600,000
3,200,000 2,950,000
$3,550,000
600,000
450,000
$2,600,000$3,100,000
3,200,000 2,950,000
$ (600,000) $ 150,000

13-31

Throughput
Throughput Costing
Costing
An extreme form of variable costing which follows
the principles of the Theory of Constraints.
It is a radical departure from other methods in that it
treats all costs except unused materials as expenses.
It does not record work in process or finished goods
inventories.
It treats all direct labor and manufacturing overhead
costs as period costs expensing them as they are
incurred.

13-32

Income
Income Statement
Statement Comparison
Comparison
Absorption
Costing

Sales

Variable Throughput
Costing
Costing

$180,000 $180,000 $180,000

Cost of sales

90,000

63,000

50,000

Gross margin

90,000

117,000

130,000

30,000

50,000

Other expenses:
Other mfg. costs
Selling and admin.

15,000

15,000

15,000

Total other expenses

15,000

45,000

65,000

Income

$ 75,000 $ 72,000 $ 65,000

13-33

Chapter 13
The
The End
End

13-34

13-35

SMP Company, Operating Data 20X1

Production in ;units
110,000
Sales in units, at $80 each
90,000
Ending inventory in units
20,000
Actual production costs:
Variable
$2,255,000
Fixed
$3,200,000
Selling and administrative expenses:
Variable at $5 per unit
$450,000
Fixed
$1,400,000
Standards and budgets:
Budgeted fixed production costs
$3,000,000
Standard variable production costs
$20 per unit
Return to Slide 13-10