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Variable Costing: A
Tool for Management
Overview of Absorption and
Variable Costing
The only cost of driving my car
on a 200 mile trip today is
$12 for gasoline.
Variable
Costing
Absorption
Costing
Variable
Costing
Direct Labor
Work in
Variable Process
Manufacturing
Overhead
Cost of
Fixed Finished
Goods
Manufacturing Goods
Overhead Sold
150 Fixed
manufacturing
100 overhead in
inventories
50
Variable
0 costing
Inventory Retained
Earnings
No change in Harvey’s
cost structure.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003
Harvey Co. Year 2
All fixed
manufacturing
overhead is
expensed.
Absorption Variable
Costing Costing
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003
Variable versus
Absorption Costing
Depreciation,
taxes, insurance and These are capacity
salaries are just as costs and will be
essential to products incurred even if nothing
as variable costs. is produced.
Absorption Variable
Costing Costing
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003
Variable versus
Absorption Costing
They are the
Absorption
numbers that
costing product costs appear on our
are misleading for external
decision making. reports.
Variable Absorption
Costing Costing
$200,000
COGS
$150,000
$100,000
00
00
00
00
00
00
00
,0
,0
,0
,0
,0
,0
,0
10
14
18
22
26
30
34
Number of units produced
Production
tends to equal
sales . . .