Absorption costing, Variable Costing and Supervariable Costing

 ABSORPTION, VARIABLE COSTING AND SUPERVARIABLE COSTING 

1️⃣ ABSORPTION COSTING (Full Costing)

🔹 Core Concept

All manufacturing costs (Variable + Fixed) are absorbed by units produced

🔹 Cost Components

• Direct Material ✔
• Direct Labour ✔
• Variable MOH ✔
• Fixed MOH ✔ (Product cost)

🔹 Income Statement Format

Sales
– COGS (includes fixed MOH)
= Gross Profit
– Selling & Admin (fixed + variable)
= Operating Income

🔹 Exam-Critical Points

• Required for external financial reporting (US GAAP) ✔
• Inventory valuation includes fixed MOH
• Profits depend on production level, not sales
• Over/under-absorption of fixed overhead possible
• Encourages overproduction to increase profit (exam favorite)

🔹 Profit Relationship (KEY MCQ)

• If Production > Sales → Higher profit
• If Production < Sales → Lower profit

2️⃣ VARIABLE COSTING (Marginal Costing)

🔹 Core Concept

Only variable manufacturing costs are product costs

🔹 Cost Components

• Direct Material ✔
• Direct Labour ✔
• Variable MOH ✔
• Fixed MOH ❌ (Period cost)

🔹 Income Statement Format (Contribution Format)

Sales
– Variable Costs
= Contribution Margin
– Fixed Costs (MOH + S&A)
= Operating Income

🔹 Exam-Critical Points

• Fixed MOH expensed fully in the period
• Inventory valued at variable manufacturing cost only
• Profit depends on sales volume, not production
• Used for CVP analysis, internal decision-making
• NOT allowed for external reporting (US GAAP)

🔹 Profit Relationship

• If Production = Sales → Same profit as absorption
• If Production > Sales → Lower profit
• If Production < Sales → Higher profit

🔹 Profit Difference Formula (VERY IMPORTANT)

Difference in Profit = Change in Inventory × Fixed MOH per unit

3️⃣ ACTIVITY-BASED COSTING (ABC)

🔹 Core Concept

Costs are traced to activities → then to products using cost drivers

🔹 Steps (Exam Order Sensitive)

1. Identify activities
2. Create cost pools
3. Select cost drivers
4. Compute activity rates
5. Assign costs to products

🔹 Key Terms to Remember

• Cost Pool
• Cost Driver
• Cost Hierarchy:
• Unit-level
• Batch-level
• Product-level
• Facility-level

🔹 Exam-Critical Points

• Improves cost accuracy in multi-product, complex environments
• Reduces cost distortion
• Helps identify non-value-added activities
• Fixed costs may be treated as variable in long run
• Better than traditional costing when:
• High overhead
• Diverse products
• Different consumption of resources

🔹 ABC vs Traditional (MCQ Favorite)

Basis	Traditional	ABC
Allocation	Volume based	Activity based
Accuracy	Low	High
Overhead	Single rate	Multiple rates

4️⃣ SUPER-VARIABLE COSTING (Throughput Costing)

🔹 Core Concept

Only Direct Material is product cost

🔹 Cost Treatment

Cost	Treatment
Direct Material	Product cost
Direct Labour	Period cost
MOH (Variable & Fixed)	Period cost

🔹 Throughput Formula

Throughput = Sales – Direct Material

🔹 Exam-Critical Points

• Based on Theory of Constraints (TOC)
• Focus on bottleneck (constraint)
• Goal: Maximize throughput per constrained resource
• Extremely short-term decision tool
• Lowest inventory valuation

🔹 Comparison Snapshot

Method	Inventory Value	Profit Volatility
Absorption	Highest	High
Variable	Medium	Moderate
ABC	Accurate	Depends
Super-Variable	Lowest	Sales driven

🔥 ULTRA-IMPORTANT COMPARATIVE SUMMARY (MEMORISE)

Aspect	Absorption	Variable	ABC	Super-Variable
Fixed MOH	Product	Period	Activity based	Period
GAAP Allowed	✔	❌	✔	❌
Inventory Value	Highest	Lower	Accurate	Lowest
Best Used For	External reports	CVP decisions	Cost accuracy	Constraint decisions
Profit Depends On	Production	Sales	Activities	Sales & bottleneck

🎯 COMMON US CMA EXAM TRAPS

• Profit differences due to inventory change
• Misclassification of fixed MOH
• ABC driver selection errors
• Confusing variable costing with throughput costing
• Ignoring constraint in TOC questions

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Illustration question ⁉️

🔢 PART A: ABSORPTION vs VARIABLE COSTING (Profit Difference)

MCQ 1

A company produces 10,000 units and sells 8,000 units.
Fixed manufacturing overhead = $40,000.
Selling price = $25/unit.
Variable manufacturing cost = $12/unit.
Variable selling expense = $2/unit.
Fixed selling expense = $10,000.

What is the difference in profit between absorption and variable costing?

✅ Calculation

Fixed MOH per unit = 40,000 ÷ 10,000 = $4/unit
Inventory increase = 10,000 – 8,000 = 2,000 units

Profit difference = Change in inventory × Fixed MOH per unit
= 2,000 × 4 = $8,000

✔ Answer:

Absorption costing profit is $8,000 higher

MCQ 2

If sales exceed production by 1,500 units and fixed MOH per unit is $6, then absorption costing profit is:

A. $9,000 higher
B. $9,000 lower
C. Same
D. Cannot be determined

✅ Calculation

1,500 × 6 = $9,000

Since Sales > Production → Absorption profit is LOWER

✔ Answer:

B. $9,000 lower

🔢 PART B: ABSORPTION vs VARIABLE (Operating Income)

MCQ 3

Production = 12,000 units
Sales = 10,000 units
Selling price = $30
Variable manufacturing cost = $14/unit
Fixed manufacturing overhead = $60,000

Find absorption costing operating income.

✅ Calculation

Fixed MOH per unit = 60,000 ÷ 12,000 = $5

Absorption cost per unit = 14 + 5 = $19

Sales = 10,000 × 30 = 300,000
COGS = 10,000 × 19 = 190,000

Operating Income = 300,000 – 190,000 = $110,000

✔ Answer:

$110,000

🔢 PART C: ACTIVITY-BASED COSTING (ABC)

MCQ 4

A company has the following overhead:

Activity	Cost	Driver	Units
Machine setups	$90,000	Setups	300
Quality inspection	$60,000	Inspections	1,200

Product A uses:

• 60 setups
• 240 inspections

Calculate ABC overhead assigned to Product A.

✅ Calculation

Setup rate = 90,000 ÷ 300 = $300/setup
Inspection rate = 60,000 ÷ 1,200 = $50/inspection

Overhead:

• Setups = 60 × 300 = 18,000
• Inspections = 240 × 50 = 12,000

Total ABC overhead = 30,000

✔ Answer:

$30,000

MCQ 5 (ABC vs Traditional – Trick)

Traditional costing allocates $150,000 overhead using machine hours (30,000 hours).
Product X uses 3,000 hours.

ABC assigns only $90,000 overhead to Product X.

Traditional overhead assigned to Product X is:

✅ Calculation

Traditional rate = 150,000 ÷ 30,000 = $5/hour

Product X overhead = 3,000 × 5 = $15,000

✔ Answer:

$15,000
👉 Product X is overcosted under ABC? ❌
👉 Product X is undercosted under traditional? ❌
👉 ABC reveals higher actual cost.

🔢 PART D: SUPER-VARIABLE (THROUGHPUT) COSTING

MCQ 6

Selling price per unit = $80
Direct material = $30/unit
Direct labour = $20/unit
Variable MOH = $10/unit
Fixed cost = $50,000
Sales = 2,000 units

Find throughput income.

✅ Calculation

Throughput per unit = 80 – 30 = $50

Total throughput = 2,000 × 50 = 100,000

Throughput income = 100,000 – Fixed costs
= $50,000

✔ Answer:

$50,000

MCQ 7 (TOC – Bottleneck Decision)

Machine hours are limited to 4,000 hours.

Product	Throughput/unit	Hours/unit
A	$60	4
B	$45	2

Which product should be prioritized?

✅ Calculation

Throughput per constrained hour:

• A = 60 ÷ 4 = 15
• B = 45 ÷ 2 = 22.5

✔ Answer:

Product B

🔢 PART E: MIXED COSTING COMPARISON

MCQ 8

Which costing method shows the highest closing inventory value?

A. Variable costing
B. Absorption costing
C. Throughput costing
D. ABC

✔ Answer:

B. Absorption costing

🔥 EXAM GOLD FORMULAS (MEMORISE)

• Profit Difference = Δ Inventory × Fixed MOH/unit
• Throughput = Sales – Direct Material
• ABC Rate = Cost Pool ÷ Cost Driver Units
• Contribution = Sales – Variable Costs

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