Chapter 14Measuring and Assigning Costs for

Income Statements

Key Topics:– Absorption costing– Variable costing– Throughput costing– Reconciling income– Actual versus normal costing– Uses and limitations of costing information

Absorption Costing

Absorption Costing Income Statement

Variable Costing

Variable Costing Income Statement

Throughput Costing

Throughput Costing Income Statement

Asian Iron

Production:10,500 unitsSales: 9,400 units at NT$32,900Variable direct materials cost: NT$2,300Variable direct labor cost: NT$3,300Variable manufacturing overhead: NT$2,800

Variable selling: NT$940Fixed manufacturing overhead: NT$8,250Fixed selling and administrative costs: NT$14,560

Asian Iron

Prepare each of the following income statements:

• Absorption• Variable• Throughput

Reconciling the Income Statements

To reconcile income:

Analyze changes in inventory levels– Absorption costing inventory includes

overhead allocation– Variable costing inventory includes only

variable costs– Throughput costing inventory includes only

direct materials

Reconciling the Income Statements for Asian Iron

Assume there is no beginning inventory and calculate:• Ending inventory amounts under the

absorption, variable, and throughput methods

• A reconciliation of variable and throughput income to absorption income

Actual versus Normal Costing

Actual allocation rate

= Actual overhead/Actual volume

Normal allocation rate

= Estimated overhead/Estimated volume

Normal costing requires end of period adjustment: Volume variance

= Expected overhead - allocated overhead

Happy Bikers Motorcycle Company

• Following is information about operations at Happy Bikers. Price and variable cost information is per unit.

Price is $10,000, raw materials cost is $2,000, direct labor and variable overhead is $1,000, variable selling and administration is $250.

Fixed costs are per month and include $40,000 for production costs and $35,000 for fixed selling and administration.

There is no beginning inventory, average production is 10 motorcycles per month, but last month 18 units were produced and 15 were sold. For absorption costing, Happy Bikers’ accountants use normal costing with 10 units as the volume denominator.

Happy Bikers Motorcycle Company

• Prepare an absorption costing income statement for Happy Bikers using actual costing.

• Prepare an absorption costing income statement using normal costing.

• Reconcile the actual and normal income statements.For the beginning of the next class:• Prepare a variable costing income statement for Happy

Bikers.• Prepare a throughput costing income statement for Happy

Bikers.• Reconciles the variable and throughput costing income

statements to the absorption costing statement using normal costing.

Uses and Limitations of Costing Information

Absorption costing information is GAAP, and includes average costs so it is not appropriate for decision making

Variable costing is not GAAP but is useful for decision making

Throughput costing is not GAAP but is useful for short-term capacity decision making