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 |
|
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 |
|
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 |
|
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 |