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 Topic: variable costs included in inventory ( Topic Closed)
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dbresnick
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| Posted: 14 Nov 2009 at 15:32 | IP Logged
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In Becker B5-37, it says "under variable costing, the variable selling, general, and administrative expenses (S,G,&A) are part of the total variable costs for the contribution margin calculation." This is exactly what Peter Olinto said in the lecture as well. But here is a question from the passmaster homework that seems to contradict this:
Using the variable costing method, which of the following costs are assigned to inventory?
Ans: Variable SG&A NO, Variable factory overhead costs YES
and the explanation says that only direct material, direct labor, and variable overhead are assigned to inventory.
I thought that the costs included in the contribution margin are what is assigned to inventory, and therefore include variable SGA, so can someone please clarify?
Thanks!
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venugopal
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| Posted: 14 Nov 2009 at 15:45 | IP Logged
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dbresnick,
Remember that variable costing is a "costing" method for inventory and contribution margin is not a "costing" method. Contribution margin a more like a tool used in decision making (Break-even, make vs buy decision etc). If you don't want to get into too much detail than just remember basics that you assign Direct labor, direct material and overhead cost to inventory. For variable costing, you assign direct labor, direct material and variable overhead. Hope this helps.
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dbresnick
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| Posted: 14 Nov 2009 at 15:52 | IP Logged
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thanks for the help. So is the variable sg&a just a period expense that gets included in operating expenses?
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bryris
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| Posted: 14 Nov 2009 at 16:20 | IP Logged
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The difference here is between the definitions of "product" cost and "period cost". With "product" costs, the amount reflected in the inventory account will include these costs.
As such, the variable costing method will inventory (a verb) all variable costs - that are also product costs by nature. DM, DL, VOH. Variable selling and administrative is awfully tempting to throw in there too, because it is a variable cost. However, these do not represent product costs. The costs to sell a product are not inventory. For example, you cannot capitalize a sales commission.
For full costing, the same rule applies. Only product costs are inventoriable. However, you can add in fixed OH to the product cost.
Under either method, variable selling/admin are expensed in the period as a period costs.
The income statement under both methods will put the variable SGA in different places for subtotaling purposes (i.e. not included in GM in full, but included in CM for variable). <--- remember CM is after ALL variable costs, so this one lone period cost, needs to be thrown into the mix after inventorying (sp?) the variable product costs to determine contribution margin. From there, fixed costs only are subtracted to yield operating income.
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kj_nyc
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| Posted: 14 Nov 2009 at 16:27 | IP Logged
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dbresnick wrote:
| So is the variable sg&a just a period expense that gets included in operating expenses? |
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Correct.
A lot of people confuse contribution margin versus cost of goods sold. They are different. SG&A are always period expenses, not product costs. The only difference between direct/variable costing versus absorption costing is that fixed OH costs are inventoriable product costs under absorption costing but expensed as period costs under direct/variable costing.
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