Product Costing

Techniques
Chapter 5
Product and Period Cost

Product Costs (Inventoriable Cost)

 Capitalized as inventory until they are sold and
transferred to Cost of Goods Sold
Period Costs
 Have no future value and are expensed in the
period incurred
Product Costing Techniques

 Throughput Costing
 Variable Costing
 Absorption Costing
Throughput Costing system

 is a costing approach under which only direct materials

are recorded as inventory costs while all other
manufacturing costs (including direct labor and variable
factory overhead) are expensed as period costs. Selling
and administrative costs are expensed as period costs as
well.
Variable Costing

 is a managerial accounting costconcept. Under

this method, manufacturing overhead is incurred
in the period that a product is produced. This
addresses the issue of absorption costing that
allows income to rise as production rises.
Absorption Costing

 is a costing system which treats all costs of

production as product costs, regardless weather
they are variable or fixed. The cost of a unit of
product under absorption costing method
consists of direct materials, direct labor and both
variable and fixed overhead.
 Fixed Manufacturing Overhead
Absorption Costing Variable Costing

Fixed manufacturing overhead is Fixed manufacturing overhead is treated

treated as a product cost. as a period cost and deducted in full each
year from revenues.

Fixed mfg.
overhead is
never an
asset.
Illustration:

AGA company manufactures and sells a product for $20 per Kg. The
data for the year 2016 is given below:
•Sales in kgs: 75,000 kgs
•Finished goods inventory at the beginning of the period: 12,000 kgs
•Finished goods inventory at the closing of the period: 17,000 kgs
Manufacturing costs:
•Variable cost: $8 per Kg
•Fixed manufacturing overhead cost: $320,000 per year
Marketing and administrative expenses:
•Variable expenses: $2 per Kg of sale
•Fixed expenses: $300,000 per year

•Requirement: Compute the Income Statement under Absorption and

Variable Costing
*Production for the year 2016:
Units manufactured during 2016 = Units sold + Units in closing inventory –
Units in opening inventory
= 75,000 kgs + 17,000 kgs – 12,000 kgs
= 80,000 kgs
**Manufacturing expenses per unit:
Variable expenses + Fixed expenses
= $8 + ($320,000/80,000 kgs)
= $8 + $4
= $12
Reconciliation of the Difference