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  • Okay now let's talk about variable verse absorption costing. Now these are two different basic

  • ways of presenting an income statement for a manufacturing company. Looking at this we're

  • gonna have absorption costing which absorbs certain costs. This is what GAP says. This

  • is for external reporting purposes. This is product versus period costs versus direct

  • variable prime contribution margin income statement. This is sales minus variable equals

  • contribution margin minus fixed equals your pretax operative income. This one separates

  • variable from fixed costs. So let�s setup what our income statements

  • look like. Here I'll put absorption and this is called absorption costing or full costing.

  • And then over here we'll do variable costing. Now under your absorption and full costing,

  • what are we doing here? This is going to be your sales minus costs of goods sold.

  • That looks familiar. But costs and goods sold are going to be both your variable costs of

  • goods sold and your fixed. That equals your gross profit minus SGNA, selling general administrative.

  • Those are going to be both variable and fixed. Equals your pretax operating income. Notice

  • this is your regular GAP income statement. Right this is GAP. This is what we use for

  • external reporting purposes. This is the one that you're used to seeing.

  • What are we doing here? We're separating out our product costs from our period costs. Cause

  • remember when we defined it, what did we say? We said a product costs is the cost of creating

  • the product that gets capitalized or absorbed into ending inventory. And then expensed as

  • you sell it so it's a product cost. SGNA is a period cost if it expensed in the period

  • in which it occurs, that's a period cost. Okay! Let's talk about absorption versus direct.

  • This is called direct prime. This is also called your contribution margin income statment.

  • So you'll see here there were direct variable prime contribution. So, also variable cause

  • what we're really looking at are variable versus fixed.

  • Now one of the things that you'll see is this is really for more management sides only.

  • This is for internal reporting purposes. Here we're going to start out with the same number

  • sales, but we're gonna take out our variable costs of goods sold, and our variable SGNA.

  • That'll give us something called CM. That's called a contribution margin, I'll come back

  • to that. Minus our fixed manufacturing costs, minus our fixed SGNA equals same pretax operating

  • income. Now I say same cause it�s the same term but the amount won't be the same and

  • you'll see why in just a minute. Okay, so what we're doing here is in this

  • case we're separating out what variable costs from fixed costs. So here it's called variable

  • direct prime contribution. Why? Because in this case what it assumes is fixed costs are

  • a sunk costs. I got these fixed sunk costs. So what I'm really concerned with is my variable

  • costs. So it's sales minus variable costs is CM. What does CM mean? It stands for contribution

  • margin. We're going to use this in the next section

  • for break even analysis. Basically cause you'll see in the next part of this section is break

  • even analysis we use CM or contribution margin. CM means how much money is left over after

  • deducting variable costs to contribute to fixed costs and profit. How much is left over

  • from revenue sales after deducting variable costs to contribute. What is the margin left

  • to contribute to fix and profit. That's what the difference is, that's what they're saying.

  • Now, when you look at these two formulas the numbers are all going to be the same except

  • two important numbers. Fixed costs of goods sold and fixed manufacturing costs. These

  • two numbers are gonna be different and you'll see why in just a minute. Those two numbers

  • are going to be different. So, everything else will be the same. It's just the difference

  • between these two numbers. These two numbers. That's what's really gonna be the difference,

  • that's how it's going to affect our calculations. So, when you look in your notes you'll see

  • these formulas in there. You'll see two income statements for a manufacturing company and

  • you've got sales minus variable minus fixed. Costs of goods sold is gross margin. Variable

  • STNA fixed STNA is operative income. Again, I separated out what product from period.

  • Versus direct variable prime contribution for internal purposes separates out variable

  • from fixed. Variable from fixed. Okay! The real difference is going to be the treatment

  • of our items such as fixed costs of goods sold and fixed manufacturing costs.

Okay now let's talk about variable verse absorption costing. Now these are two different basic

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A2 US variable fixed contribution absorption margin income

Variable and Absorption Costing - Lesson 1

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    陳虹如 posted on 2017/06/23
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