Varilux manufactures a single product and sells it for $10 per unit. At the begi

Question

Varilux manufactures a single product and sells it for $10 per unit. At the beginning of the year there were 1,000 units in inventory. Upon further investigation, you discover that units produced last year had $3.00 of fixed manufacturing cost and $2.00 of variable manufacturing cost. During the year Varilux produced 10,000 units of product. Each unit produced generated $3.00 of variable manufacturing cost. Total fixed manufacturing cost for the current year was $40,000. There were no inventories at the end of the year. Required: Prepare two income statements for the current year, one on a variable cost basis and the other on an absorption cost basis. Explain any difference between the two net income numbers and provide calculations supporting your explanation of the difference.

Explanation / Answer

as per Absorption Costing, income Statements are as follows.. Sales=(10000*10)+(1000*10)= 110000 -Variable manufacturing cost =10000*3= 30000 -Fixed manufacturing cost= 40000 -Opening Stock=1000*(3+2) 5000 Total Profit 35000 As per Marginal Costing Sales=(10000*10)+(1000*10)= 110000 -Variable manufacturing cost =10000*3= 30000 -Fixed manufacturing cost= 40000 -Opening Stock=1000*2 2000 Total Profit 38000 Difference is due to Fixed Cost..in marginal Costing Techniquie ..it is assumed that fixed overheds are absorbed in the year itself.it has not been considered in the valuation of closing stock.

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