Chapter 5

Variable Costing

Learning Objectives

  1. Explain the difference between full (absorption) and variable costing.
  2. Prepare an income statement using variable costing.
  3. Discuss the effect of production on full and variable costing income.
  4. Explain the impact of JIT (just-in-time) on the difference between full and variable costing income.
  5. Discuss the benefits of variable costing for internal reporting purposes.


In 2012, the all-tube amplifier produced by Clausen Tube received rave reviews and the company was able to sell all 5,000 units it produced, generating company profit of $3,500,000.

Based on these results, the company increased production to 6,000 units in the subsequent year but was able to sell only 4,800 units. This performance, however, was considered quite good given that the economy had slipped in the third and fourth quarters.

In early January of 2014, Robert Clausen, company president and founder, reviewed financial performance for 2013. Surprisingly, profit had actually increased slightly to $3,528,000. Robert was confused and wasted no time calling Leslie Anders, the company controller. “What's going on?” Robert asked in a voice that hinted at his irritation. “Sales are down, the production process and prices haven't changed, and yet profit is up! How confident ...

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