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Variable and Absorption Costing - Lesson 1

In 4.06 Variable and Absorption Costing – Lesson 1, Roger Philipp, CPA, CGAM, gives a high-energy conceptual whiteboard demonstration on the two most commonly-used types of income statements for manufacturing companies. After just five minutes you'll have a better understanding of the differences between absorption costing (GAAP) and variable costing (non-GAAP, internal use) income statements. One first subtracts product costs from revenue, then subtracts period costs from this gross margin to arrive at pretax operating income. The other subtracts variable costs from revenue, then subtracts fixed costs from this contribution margin to arrive at pretax operating income. Roger warns that the operating income amounts will never be the same due to the different methods’ treatment of fixed Cost of Goods Sold and fixed manufacturing costs. Roger also explains why contribution margin is called contribution margin while looking ahead to breakeven analysis, which is covered later in BEC. In this particular lesson, Roger sets the stage for Lesson 2, where the differences between variable and absorption costing will be shown through specific examples. Connect with us: Website: https://accounting.uworld.com/cpa-rev... Blog: https://accounting.uworld.com/blog/cp... Twitter:   / uworldrogercpa   Facebook:   / uworldrogercpareview   Instagram:   / uworldrogercpareview   Pinterest:   / uworldrogercpareview   LinkedIn:   / uworld-roger-cpa-review   Are you accounting faculty looking for FREE CPA Exam resources in the classroom? Visit our Professor Resource Center: https://accounting.uworld.com/cpa-rev... Video Transcript Sneak Peek: Okay now let's talk about variable verse absorption costing. Now these are two different basic ways of presenting an income statement for a manufacturing company. Looking at this we're gonna have absorption costing which absorbs certain costs. This is what GAP says. This is for external reporting purposes. This is product versus period costs versus direct variable prime contribution margin income statement. This is sales minus variable equals contribution margin minus fixed equals your pretax operative income. This one separates variable from fixed costs.