Variable and Absorption Costing – Lesson 2

which of the following would be a line item for a variable costing income statement? This is a topic that many people are looking for. is a channel providing useful information about learning, life, digital marketing and online courses …. it will help you have an overview and solid multi-faceted knowledge . Today, would like to introduce to you Variable and Absorption Costing – Lesson 2. Following along are instructions in the video below:

“Let us pretend that i ve got some numbers nand. I ll put them on on this side so let s say over here i ve got direct materials ndirect variable overhead fixed overhead absorption and direct okay let s say i ve got 200 of direct. Materials i ve got a 125 of direct. Labor i ve got 75 of variable.

Overhead and i have 120 of fixed overhead. This is for absorption purposes. Now where did this fixed. Overhead come from let s pretend that my fixed.

Overhead is. 120000 na. Year. Maybe it.

s. Rent now i am going to manufacture. 100000. Units that equals 120.

A unit. So that is how much per unit is fixed overhead. Okay now under absorption costing..


It s called nabsorption because whatever doesn t get sold that part of the overhead will get absorbed ninto ending inventory. It doesn t get expensed it gets absorbed into nending inventory. So that s what s going to happen now under direct direct materials still the same that gets put into ending ninventory direct labor that s going to get put into nending inventory variable overhead that s gonna get put into nending inventory but the question is what an inventoriable ncost well of the fixed overhead under direct variable nprime. We re only going to capitalize the variable costs what are variables materials variable labor variable variable noverhead is variable what about fixed overhead fixed is a sunk cost so as far as direct prime contribution here.

Nwhat they re gonna do here is they re going to. Expense all 120000. All 120 gets expensed. So over here how much gets inventoried.

None of it when i talk about how much is my inventoriable ncost per unit. This would be two 325 four. 520 this is two three four. Dollars the difference is what the 120.

That here got absorbed into ending. Nhere got expensed let s say for example that my production was. N100000. Units but my sales were only 80000 units that means ending inventory s gonna go up nby 20000 units.

Everybody see that so that s whats going to happen ending inventory is going to go up. Now what happens is if i sold 80000. Units..


What s going to happen under absorption. What does gap say gap says your costs are going. To. Be 80.

At. N. 120 is 96000. So.

Over here. I m going to. Expense. Fixed.

Costs nof. Goods sold is going to be. 96000. Here it s going to be what 120000.

Notice. What is the difference between 96. And n120 well..


I ll show you an easier way to figure nthis out what s the difference between what i. Produced nand what i sold ending inventory went. Up. By 20000.

Dollars. Nor 20000. Units 20000 units at a. 120 a unit is 24000.

I bet you that is the difference in this what s 120 minus 24. 96 so the profit difference between these ntwo is going to be what the. 20000 units in. Ending times the.

120 nof your fixed. Overhead which is 24000. That s going to be difference in the profit nbetween these two methods why because under. Gap you can t expense it.

Till nyou sell it so i spend. 120000 on. Rent but i need to allocate..


Nthat a 120. A unit times the units sold and the units in ending. The stuff i sold. Was 80000 the stuff in ending nis.

20000 so the 20000 times 120 gets absorbed in ending under direct variable prime. They go why because the fixed cost is sunk. I don t care expense it so here they re going to expense. What all 120 under fixed manufacturing.

That s why i call them different. I call this fixed manufacturing costs and ni call this fixed costs of goods. Sold because this is still based on 80000. Units nthis is based on all 100 because it s a sunk cost it s gone.

It s done. It s history. It is his his history. So that s what we re basically saying ” .


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