Chapter 6 Variable Costing and Segment Reporting

Variable Costing only those manufacturing costs that vary with output are treated as product costs
- Direct materials, direct labor, variable piece of manufacturing overhead (ex: glue or paint)
- Fixed overhead is treated like period cost, or like selling and admin expenses, and expensed
in entirety each period.
- Unit cost of product in inventory does not include any fixed overhead then
- Also referred to as Direct Costing or Marginal Costing

Absorption Costing (review from Ch 3) treats all manufacturing costs as product cost, regardless of
whether they are fixed or variable.
- Direct materials, direct labor, and both variable and fixed manufacturing overhead.
- Allocates a portion of fixed overhead to each unit of product
- Also referred to as Full Cost method

Variable VS Absorption Costing Example

Weber Light Aircraft information:
Variable Costing Contribution Format Income Statement:

Absorption Costing Income Statement:

Advantages of Variable Costing:
- Enabling CVP Analysis easier to analyze CVP since costs are broken out between variable
and fixed
- Explaining changes in Net Operating Income
o Number of units produced does not affect net operating income
Absorption costing holds Fixed overhead costs in inventory until units are
sold
- Supporting decision making
o Identifies the cost to making 1 more unit

Segmented Income Statements as a company grows, managers need to see more detail of total income
statement #s, broken out by other areas such as divisions, product lines, sales channels, etc.