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Chapter 15 Overhead Application: Variable and Absorption Costing Learning Objective 1 Variable Versus Absorption Costing Variable Versus Absorption Costing The differences between variable-costing and absorption-costing methods are based on the treatment of fixed manufacturing overhead. Variable Versus Absorption Costing Variable Versus Absorption Costing Comparative Income Statement for Variable-Costing Method Objective 2 Fixed-Overhead Rate Cost of Goods Sold forAbsorption-Costing Method Cost of Goods Sold forAbsorption-Costing Method Comparison of Variable andAbsorption Costing Reconciliation of Variable Costing and Absorption Costing Reconciliation of Variable Costing and Absorption Costing Under absorption costing, fixed overhead appears in the cost of goods sold and also in the production volume variance. Under variable costing, fixed overhead is a period cost. Learning Objective 3 Production-Volume Variance Production-Volume Variance Volume Variance Other Variances Learning Objective 4 Practical Capacity Maximum, or full capacity, used as the expected activity level in calculating the fixed-overhead rate, is often called practical capacity. Normal Costing Actual, Normal, and Standard Costing Actual, Normal, and Standard Costing Learning Objective 5 Why Use Variable Costing? Flexible-Budget Variances Flexible-Budget Variances Flexible-Budget Variances Learning Objective 6 Disposition of Standard-Cost Variances Disposition of Standard-Cost Variances One view is that in standard costing the “standards” are viewed as currently attainable. Therefore, variances are not inventoriable and should be treated as adjustments to the income of the period instead of being added to inventories. Disposition of Standard-Cost Variances Another view favors assigning the variances to the inventories and cost of goods sold related to the production during the period the variances arose. This is often called prorating the variances. Learning Objective 7 Product