4 Oct 2022


Managerial Accounting-Variable Costing

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Details Commodity A 

Starting inventory (Units) 10,000 

Units produced 10,000 

Goods available for sale 9,000 

Closing stock 1,000 

Details Commodity B 

Budgeted fixed manufacturing expenses $250,000 

Budgeted production 10,000 

Budgeted fixed manuf. Cost per unit 25 

Budgeted variable cost per unit 220 

Budg. Total manuf. Cost per unit 245 

Variable Costing Income Statement 

Details Commodity B 

Units disposed 9000 

Price per unit $300 

Total sales of commodity $2,700,000 

Variable manufacturing expense $2,200,000 

COGAFS 2,200,000 

Less: Closing stock (220,000) 

Variable cost of products disposed 1,980,000 

Add variable admin and selling costs 90,000 

Total variable cost 2,070,000 

Contribution Margin 630,000 

Less fixed costs 350,000 

Net income 280,000 

Absorption Costing Income Statement 

Details Commodity B 

Units 9000 

Selling price per unit 300 

Total sales of commodity 2,700,000 

Less variable manufacturing cost 2,200,000 

Allocated fixed manufacturing cost 250,000 

Cost of goods available for sale 2,450,000 

Less ending inventory (245,000) 

Cost of goods sold 2,205,000 

Gross margin 495,000 

Less variable admin and selling cost 90,000 

Fixed admin and selling cost 100,000 

Total admin and selling costs 190,000 

Net income 305,000 

The major aim for the distinction between absorption and variable costing is that the statement of financial performance varies in terms of fixed manufacturing overheads. It must be noted that under variable costing income statement, fixed manufacturing overheads are not involved under the cost of products sold and manufacturing overheads are part of the ending inventory ( Horngren, Sundem, Schatzberg & Burgstahler, 2013). It should also be noted that in absorption costing, fixed manufacturing overheads do not form part of the closing stock. Involving fixed manufacturing overhead in cost of goods sold under absorption costing is high compared to net income relating to variable costing ( Kaplan & Atkinson, 2015). 

Assuming the selling price per unit escalates to $320 per unit; 

Details Commodity B 

Units sold 9000 

Selling price per unit 320 

Total sales 2,880,000 

Variable manufacturing cost 2,200,000 

Cost of products available for sale 2,200,000 

Less closing inventory (220,000) 

Variable cost of products disposed 1,980,000 

Total variable costs 2,070,000 

Contribution margin 810,000 

Fixed costs (350,000) 

Net income 460,000 

Absorption Costing Income Statement 

Details Commodity B 

Units disposed 9000 

Selling price 320 

Total sales 2,880,000 

Less: variable manufacturing cost 2,200,000 

Fixed manufacturing cost 250,000 

COGAFS 2,450,000 

Closing inventory (245,000) 

Cost of goods sold 2,205,000 

Gross margin 675,000 

Selling and admin costs 190,000 

Net income 485,000 


Details Particulars Particulars 

Sales 300 

Variable cost: 

Direct material 120 

Direct labor 60 

Variable overhead 40 

Var. selling & admin 10 

Total variable expenses 230 

Contribution margin per unit 70 

Breakeven point = fixed expenses/contribution margin per unit 


Company must sell 5000 units to attain its breakeven point 

Breakeven if cost of direct materials increase from $120 to $150 

Details Particulars Amount 

Sales 300 

Direct material 150 

Direct labor 60 

Variable overhead 40 

Variable admin and selling 10 

Total variable cost 260 

Contribution margin per unit 40 

Breakeven point = Fixed costs/contribution margin per unit 


=8750 units 

This means that when direct materials cost increases to 150, then the breakeven point will also rise from 5,000 to 8,750 units. 

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Absorption and marginal costing are two distinct methods of valuing the cost of goods sold and finished products in inventory. Regarding absorption costing, it is essential to note that fixed overhead are conducted as a product expense and an amount is assigned to each unit. On the other hand, marginal costing requires the treatment of fixed overheads as period expenses and are charged fully against the profit of the financial term ( Horngren, Sundem, Schatzberg & Burgstahler, 2013). These are two methods that produce slightly distinct solutions but both are essential in cost accounting for companies. The breakeven point signifies the point at which total expenses equal total revenue for a particular company. Breakeven point will enable costing accountants at Lewis Company to determine the least number of units to be produced if the organization desires to make profit. 

For instance, in this case, the company should produce at least 5,000 units or more. Anything less than that means the company will operate at a loss. Selling and administration costs vary with operations of different periods and must be accounted for in both absorption and marginal costing income statements ( Fullerton, Kennedy & Widener, 2013). Both the beginning and ending inventories play a crucial role in the income statements because they denote the over-or-under absorption of units. Closing inventory should be added to the units produced at the start of a financial period to determine the total units to be sold for the period. 

Closing inventory is what is referred to as opening inventory at the start of the next financial term. The selling price should be determined after careful consideration of all costs to ensure the company does not trade at a loss ( Drury, 2013).  All the variable and fixed costs should be added and any other consideration considered before arriving at the selling price per unit. It is fundamental to note the selling price should not be too high or too low because this is a situation that may either keep customers off or make the company operate at a loss. 


Drury, C. M. (2013).  Management and cost accounting . Springer. 

Fullerton, R. R., Kennedy, F. A., & Widener, S. K. (2013). Management accounting and control practices in a lean manufacturing environment. Accounting, Organizations and Society 38 (1), 50-71. 

Horngren, C. T., Sundem, G. L., Schatzberg, J. O., & Burgstahler, D. (2013). Introduction to management accounting . Pearson Higher Ed. 

Kaplan, R. S., & Atkinson, A. A. (2015).  Advanced management accounting . PHI Learning. 

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StudyBounty. (2023, September 17). Managerial Accounting-Variable Costing.


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