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Closing inventory 50 20 20
Variable overhead was expected to be $5 per unit. Direct materials were expected to cost $10 per unit and
direct labour to cost $5 per unit.
Absorption cost per unit was expected to be $30 ($10+$5+$5+$10) for direct materials, direct labour,
variable overhead and fixed overhead respectively).
Variable cost per unit was expected to be $20 ($10+$5+$5) for direct materials, direct labour and variable
overhead. All actual variable costs per unit turned out to be the same as estimated.
1. The total fixed overhead was $1000 per month, the same as estimated in determining the fixed
overhead rate of $10 per unit. Therefore any under(over) allocated overhead is due to actual production
being less(more) than the 100 units expected and used to determine the fixed overhead rate. For example
in July production was 150 units, 50 units more than expected, so fixed overhead was overallocated by
$500 (50 units x $10).
Chapter 8 Alternative Costing Systems 7
Variable Costing
VARIABLE COSTING
July August September
$ $ $ $ $ $
Sales 5000 6500 4500
Less Variable Costs:
O/Inventory [0,50,20 @ $20] 0 1000 400
Cost of Goods Manufactured [$20 ea] 3000 2000 1800
3000 3000 2200
Less C/Inventory [50,20,20 @ $20] 1000 400 400
Variable Manufacturing COGS 2000 2600 1800
Variable Selling $ Admin Expenses 500 650 450
Total Variable Costs 2500 3250 2250
Variable Profit (Contribution Margin) 2500 3250 2250
Less Fixed Costs:
Fixed Overhead 1000 1000 1000
Selling & Administration 500 500 500
1500 1500 1500
Profit 1000 1750 750
Check
Absorption costing income $1,500 $1,450 $750
Variable costing income $1,000 $1,750 $750
Absorption costing income higher (lower) by $500 ($300) $0
A feature of JIT production is a shift, from the traditional notion of holding three sets of inventories (raw materials, work
in process and finished goods) as buffers against variations in supply and demand and uneven work flows at differen
work stations, to holding small or even zero inventories. Inventories are simply thought of as waste. They occupy space
tie up money, and hide inefficiencies and poor quality.
The unit conversion cost is lowest in Month 2 at $900 per tonne when production was
greatest. Also, conventional accounting rewards a build up in inventory, with the highest
reported profit in Month 2, while it penalises inventory reduction with the lowest reported
profit in Month 3.
Now we see that throughput costing supports management objectives. It rewards inventory
reduction because the highest profit is recorded in Month 3. It penalises inventory accumulation
with the lowest profit reported in Month 2.
Chapter 8 Alternative Costing Systems 21