Full & Variable Costing

• Under full costing, fixed costs are included in the product cost.
• Under variable costing, only variable costs are charged to cost units, while fixed costs are excluded from the product cost. The rationale behind this is that all costs are variable in the long run.
• Contribution margin is revenue less variable costs (how much is contributed towards covering fixed costs)
• Margin is a term used when describing profitability
• Managers can be incentivised to produce higher public cost records in an attempt to gain subsidies from the government (e.g., the semiconductor industry)
• To determine how much has been under/over-absorbed in a period, calculate the OAR, multiply it by the actual cost driver and subtract that from the budgeted cost.
• Gross Profit at Standard requires to be adjusted through PVV since fixed costs per unit would either be over or undercharged because they are estimated at the beginning of the period
• Under full costing, cost of goods sold is calculated by: (Fixed OAR + Variable OAR) * Units
• The PVV is calculated by: (Units Produced - Budgeted Units) * Fixed OAR
• The Production Volume Variance explains whether actual production is above or below the budgeted volume.
• If the fixed cost per unit is overcharged (actual produced units > budgeted produced units), PPV is said to be favourable.
• If the fixed cost per unit is undercharged (actual produced units < budgeted produced units), PPV is said to be unfavourable.
• Reconciliation of Profit Differential is performed as operating profits under variable and full costing income statements will be different due to the way fixed manufacturing overhead is allocated.
• Difference in the Opening & Closing Inventory * Fixed Manufacturing Overhead = Difference in Profits under Full & Variable Costing
• Fixed manufacturing overhead is not added to opening & closing inventory under variable costing, causing the profit differential between full and variable costing in income statements.
• Full costing creates an incentive to overproduce as the absorption of fixed costs inflates operating profit.
• Overproduction under fixed costing can be solved by changing the managers' performance evaluations to eliminate perverse incentives or automating the production process to meet consumer demand and avoid overproduction.