Variable and Absorption Costing - Lesson 2

In Lecture 4.06 Variable and Absorption Costing, Lesson 2, Roger Philipp, CPA, demonstrates an example of the differences between absorption costing (GAAP) income statements and variable costing (non-GAAP, internal use) income statements. If you remember from Lesson 1, operating income will differ between the two because of how each method treats fixed Cost of Goods Sold and fixed manufacturing costs. There is a timing difference with both: absorption costing allows fixed manufacturing costs to get capitalized or absorbed into ending inventory, thus delaying the expense until the inventory is sold, while variable costing requires that the fixed manufacturing costs (sunk costs) to get expensed immediately. Under variable costing, only variable costs are considered inventoriable costs. By contrast, all product costs – both fixed and variable – are considered inventoriable costs under absorption costing. In this lesson, Roger takes us through an operating income example for a manufacturing company under both methods. He also breaks down manufacturing costs per unit between direct materials, direct labor, variable overhead, and fixed overhead, then demonstrates how the per-unit cost makes the operating income difference inevitable. Cost accounting has never been so easy! Connect with us: Website: https://accounting.uworld.com/cpa-review/ Blog: https://accounting.uworld.com/blog/cpa-review/ Twitter: https://twitter.com/UWorldRogerCPA Facebook: https://www.facebook.com/UWorldRogerCPAReview Instagram: https://www.instagram.com/uworldrogercpareview/ Pinterest: https://www.pinterest.com/uworldrogercpareview/ LinkedIn: https://www.linkedin.com/company/uworld-roger-cpa-review Are you accounting faculty looking for FREE CPA Exam resources in the classroom? Visit our Professor Resource Center: https://accounting.uworld.com/cpa-review/partner/university/ Video Transcript Sneak Peek: So let us pretend that I've got some numbers and I'll put them on this side. So let’s say over here I've got direct materials, direct labor, variable overhead, fixed overhead. Absorption and direct, okay. Let's say I've got $2.00 of direct materials. I've got a $1.25 of direct labor. I've got $.75 of variable overhead. And I have $1.20 of fixed overhead. This is for absorption purposes.