ABSORPTION VS VARIABLE COSTING LECTURE
BREAKEVEN ANALYSIS

Absorption Costing vs Variable Costing

Remember: An asset is a resource of the company that gives a future economic benefit. Inventories are assets because they give future benefits to the company in the terms of sales revenue.

Absorption costing: includes all manufacturing costs --- including direct materials, direct labor, and BOTH variable and fixed manufacturing overhead.

Absorption Costing = Full Costing

Under absorption costing, fixed overhead is a product cost until sold.

Absorption costing makes no distinction between fixed and variable costs thus is not suited for CVP analysis.

Sales less Absorption Cost of Goods Sold will equal Gross Profit

Functional Analysis of the Income Statement

Variable costing: includes only variable manufacturing costs --- direct materials, direct labor, and variable manufacturing overhead.

The entire amount of fixed costs are expenses in the year incurred.

When calculating Contribution Margin, Variable Cost of Goods Sold and Variable Selling and Administrative Expenses and subtracted from Sales.

Behavioral Analysis of the Income Statement

Variable costing can be used for Cost Volume Profit (Break-even Analysis)
Rules about Absorption Costing versus Variable Costing.

Rules about unit sales and production under the two costing methods.

If sales are variable and production constant.
a. When production is equal to sales, then absorption costing and variable costing will give the same amount of net income.

b. When production is greater than sales, then Net Income under absorption costing will be greater than net income under variable costing because a portion of the fixed costs was deferred to other years under the absorption method.

c. When production is less than sales, then Net Income under absorption costing will be less