A product company produces only one product. The following data relates to the O
ID: 2376296 • Letter: A
Question
A product company produces only one product. The following data relates to the October production.
Selling price
$200
Beginning inventory
5,000
units
Variable costs per unit:
Produced
18,000
units
Direct material
$50
Sold
20,000
units
Direct labor
$30
Ending Inventory
3,000
units
Variable manufacturing overhead
$10
Variable selling and administrative
$15
Fixed manufacturing overhead
$288,000
Fixed selling and administrative
$40,000
a. What is the unit product cost under variable costing?
b. What is the unit product cost under absorption costing?
c. Prepare an income statement for the month using the variable costing method.
d. Prepare an income statement for the month using the absorption (full) costing method.
e. What is ending inventory under variable costing?
f. What is ending inventory under absorption costing?
g. How much is the difference in the net income between full costing and variable costing and why did you get that difference?
A product company produces only one product. The following data relates to the October production.
Selling price
$200
Beginning inventory
5,000
units
Variable costs per unit:
Produced
18,000
units
Direct material
$50
Sold
20,000
units
Direct labor
$30
Ending Inventory
3,000
units
Variable manufacturing overhead
$10
Variable selling and administrative
$15
Fixed manufacturing overhead
$288,000
Fixed selling and administrative
$40,000
Explanation / Answer
a. Under variable costing, direct costs to be considered are direct material, direct labor, variable mftg overhead. So direct cost = 50+30+10 = $90/unit
b. Under absorption cost, direct costs to be considered are direct material, direct labor, variable mftg overhead and fixed mftg overhead. (note that the additional item here is fixed mftg overhead).
Fixed mftg overhead/unit = 288,000/no of units produced = 288,000 / 18,000 = $16
So direct cost = 50+30+10+16 = $106/unit
c. Income statement under variable costing:
Revenues (20000units *$200/unit) : 4,000,000
Less: Variable Expenses
Beginning Inventory (5000 units * $90/unit): 450,000
Cost of Goods Manufactured (18,000* $90/unit): 1,620,000
Less: Ending Inventory (3000 units * $90/unit): 270,000
Variable selling and administrative costs (20000 units * $15/unit): 300,000
Contribution Margin: 1,900,000
Less: Fixed Expenses
Fixed mftg overhead: 288,000
Fixed selling and administrative: 40,000
Net operating income: 1,572,000
d. Income statement under absorption costing:
Revenues (20000units *$200/unit) : 4,000,000
Less: Variable Expenses
Beginning Inventory (5000 units * $106/unit): 530,000
Cost of Goods Manufactured (18,000* $106/unit): 1,908,000
Less: Ending Inventory (3000 units * $106/unit): 318,000
Contribution Margin: 1,880,000
Less: Selling and admin Expenses
Variable selling and administrative (20,000 units * $15/unit): 300,000
Fixed selling and administrative: 40,000
Net operating income: 1,540,000
e. Ending inventory under variable costing = 3000 units * 90/unit = 270,000
f. Ending inventory under absorption costing = 3000 units * 106/unit = 318,000
g. Difference in net income = 1,572,000 - 1,540,000 = 32,000
The difference is due to the fixed manufacturing overhead unit costs assigned to inventory of $16/unit
There is beginning inventory of 5,000 units and ending inventory of 3,000 units, so a difference of 2,000 units released from inventory. This 2,000 units cost is 2,000*16 = 32,000 which explains the difference.
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