Problem 2 Cheung Company produced 10,000 units during the past year, but only 8,

Question

Problem 2

Cheung Company produced 10,000 units during the past year, but only 8,500 of the units were sold. The following additional information is also available.

Direct materials used $70,000

Direct labor incurred $30,000

Variable manufacturing overhead $25,000

Fixed manufacturing overhead $40,000

Fixed selling and administrative expenses $70,000

Variable selling and administrative expenses $10,000

There was no work-in-process inventory at the beginning of the year, nor did Cheung have any beginning finished goods inventory.

Instructions

(a) What would be Cheung Company

Explanation / Answer

(a) Under variable costing, total manufacturing cost = 70,000 + 30,000 + 25,000 = $125,000 Inventory cost = 125,000 *(1,500/10,000) = 18,750 (b)Under variable costing, Cost of goods manufactured = 125,000 * (8,500/10,000) = 106,250 Period cost = 40,000+70000+10,000 = 120,000 Total cost = 120,000 + 106,250 = 226,250 Under absorption method Cost of good manufactured = (70,000 + 30,000 + 25,000+40,000) * (8,500/10,000) = 140,250 Period cost = 70000+10000 = 80,000 Total Cost = 220,250 Absorption method has lower cost, therefore has higher net income by 6,000

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