What are absorption, variable, and throughput costing approaches?

4. Absorption, variable, and throughput costing income statements

Having learned how absorption, variable, and throughput costing approaches treat inventory and period costs, let's prepare simple income statements using these methods.

To illustrate an example, let's assume SmarterBooks Company prints and sells college textbooks. In 2009 the company had $ 2,500,000 in sales. The following information also pertains to the company's operations in 2009:

 

Absorption Costing

Variable Costing

Throughput Costing

Cost of goods sold (COGS)

$ 1,000,000

$ 650,000

$ 500,000

Fixed factory overhead

N/A*

450,000

N/A

Variable SG&A** expenses

300,000

300,000

300,000

Fixed SG&A expenses

200,000

200,000

200,000

Product conversion costs***

N/A

N/A

800,000

(*) N/A does not mean that a cost is not applicable under certain costing method. It rather means that such a cost is included in other costs. For example, under absorption costing approach, fixed factory overhead cost is included in cost of goods sold; thus, we put N/A next to the fixed overhead cost.

(**) SG&A refers to selling, general and administration expenses.

(***) Product conversion costs are composed of direct labor and factory overhead.

Important to note, direct materials, direct labor, and variable factory overhead differ under absorption, variable, and throughput costing approaches. The same is true for the beginning and ending balance in inventory accounts. However, to make our example easier to understand, we have just provided the results of our calculations rather than the calculations themselves. The results are presented in the table above.

Now let's prepare income statements using different costing methods.

Absorption Costing

SmarterBooks Company
Income Statement
For the year ended December 31, 2009

Revenue

$ 2,500,000

Cost of goods sold

1,000,000

Gross margin

1,500,000

Selling and administrative expenses

500,000

Operating income

1,000,000


Variable Costing Format

SmarterBooks Company
Income Statement
For the year ended December 31, 2009

Revenue

$ 2,500,000

Variable costs:

 

Cost of goods sold

650,000

Selling and administrative expenses

300,000

Contribution margin

1,550,000

Fixed costs:

 

Factory overhead

450,000

Selling and administrative expenses

200,000

Operating income

900,000


Throughput Costing Format

SmarterBooks Company
Income Statement
For the year ended December 31, 2009

Revenue

$ 2,500,000

Cost of goods sold

500,000

Throughput contribution

2,000,000

Other costs:

 

Product conversion costs

800,000

Selling and administrative expenses

500,000

Operating income

700,000

The calculation of the cost of goods sold and preparation of income statements under absorption, variable, and throughput costing approaches are summarized in the table below:

 

Absorption Costing

Variable Costing

Throughput Costing

Cost of Goods Sold

(+) Beginning Inventory

(+) Direct materials

(+) Direct labor

(+) Variable overhead

(+) Fixed overhead

= Goods Available for Sale

() Ending Inventory

= Cost of Goods Sold

(+) Beginning Inventory

(+) Direct materials

(+) Direct labor

(+) Variable overhead

= Goods Available for Sale

() Ending Inventory

= Cost of Goods Sold

(+) Beginning Inventory

(+) Direct materials

= Goods Available for Sale

() Ending Inventory

= Cost of Goods Sold

       

Income Statement

Revenue

() COGS

Gross Margin

() SG&A expenses

Operating income

Revenue

() Variable COGS

() Variable SG&A

Contribution margin

() Fixed overhead

() Fixed SG&A

Operating income

Revenue

() COGS

Throughput contribution

() Direct labor

() Factory overhead

() SG&A expenses

Operating income

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