Accounting for Managers

Accounting for Managers
120
able manufacturing cost of $12 per unit and fixed manufacturing
overhead costs of $200,000. GW makes 50,000 Ultimates in a
year and sells them for $50 each. This year it sold 40,000.
Under absorption costing, the fixed overhead will $4 per Ultimate
($200,000/50,000). If General Widget’s management chooses to
use variable costing, the $200,000 becomes a period expense.
In this case, the variable GSA costs come to $3 per widget and
the fixed GSA costs total $125,000. Note that in both cases, the
the total dollar amount spent is the same (Figures 6-2 and 6-3).
Absorption
Costing
Costs
Variable
Costing
Product
Direct materials
Product
Product
Product
Direct labor
Product
Product
Variable manufacturing
overhead
Product
Period
Fixed manufacturing
overhead
Period
Period
General selling and
administrative
Figure 6-1. Comparison of absorption and variable costing in general
Cost of
Goods Sold
40,000
Widgets
Absorption Costing
Ending
Inventory
10,000
Widgets
Period
Expense
Ending
Total
(COGM)
Variable mfg ovhd $12
Fixed mfg ovhd $4
Variable Costing
Variable mfg ovhd $12
Fixed mfg overhead
$480,000
$160,000
$120,000
$40,000
$600,000
$200,000
$600,000
$200,000
Total
$640,000
$160,000
$800,000
$480,000
$120,000
Total
$480,000
$120,000
$800,000
$200,000
$200,000
Figure 6-2. Comparison of absorption and variable costing
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