Reese’s Tot Toy Boxes uses variable costing to manage its internal operations. T

Question

Reese’s Tot Toy Boxes uses variable costing to manage its internal operations. The following data relate to the company’s first year of operation, when 25,000 units were produced and 21,000 units were sold.

Variable costs per unit
Direct material $50
Direct labor 30
Variable overhead 14
Variable selling costs 12
Fixed costs
Selling and administrative $750,000
Manufacturing 500,000

How much higher (or lower) would the company’s fi rst-year net income have been if
absorption costing had been used rather than variable costing? Show computations.

Explanation / Answer

Full (Absorption) Costing: (50 + 30 + 14 + 12) per unit + (750000 + 500000) in fixed costs 106 per unit + 1250000 106 * 25000 (use produced, not sold) + 1250000 = 3900000 Variable Costing: (50 + 30 + 14 + 12) per unit 106 per unit 106 * 25000 = 2650000 So I think the difference would just be the fixed costs ($1250000) in this case, since the problem is fairly simplistic.

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