((Sales price – (total variable cost + variable sales cost) x (units sold)) – FMOH - Sales and Administrative Costs
What is the difference between variable and full costing?
In full costing fixed manufacturing overhead is treated as a product cost, in variable costing it is treated as a period cost
Why income computed under full costing will exceed income computed under variable costing if production exceeds sales
When production exceeds sales, part of fixed manufacturing overhead will remain in inventory. In variable costing, the entire amount of fixed manufacturing overhead will be expensed since it is treated as a period cost. Thus, income computed under full costing will exceed income computed under variable costing when production exceeds sales.
What are the benefits of variable costing for internal reporting purposes?
Variable costing facilitates C-V-P analysis since fixed and variable costs are separated and contribution margin is calculated. Also, under variable costing, managers cannot artificially inflate profit by producing more units than they sell and burying fixed manufacturing overhead in inventory.
Why would the difference between income computed under full costing and income computed under variable costing be relativelyu small if a company used a JIT inventory management system?
Companies using JIT generally have low levels of work in process and finished goods inventory. Thus, even when a company uses full costing, very little of fixed manufacturing overhead is in inventory at the end of a period. Rather, most of it is in cost of goods sold—an expense.
Why will ending inventory balance computed under full costing always be greater than the inventory balance computed under variable costing?
Under full costing, ending inventory includes direct material, direct labor, variable manufacturing overhead, and fixed manufacturing overhead.
Under variable costing, ending inventory includes each of these items except fixed manufacturing overhead. Thus, the inventory balance under variable costing is always less than the balance under full costing (assuming the balance is not zero).
