Pacific Sports, Inc. makes surf boards. Following are inventory and cost figures
ID: 2478656 • Letter: P
Question
Pacific Sports, Inc. makes surf boards. Following are inventory and cost figures relative to the year ended June 30 2013:
Beginning inventory 1,000 units
Produced 10,000 units
Sold 8,000 units
Sales price per unit $500
Variable production costs per unit $200
Fixed production costs unit $100
SG&A Expenses $1,000,000
Required:
1. Compute the operating income using the absorption method.
2. Compute the operating income using the variable costing method.
3. Reconcile the difference.
4. Why might a company choose to use variable costing for management purposes?
Explanation / Answer
1) Profit Under Absorbtion Costing:
Sale price $ 500
Less
Variable and fixed production cost (200+100) ($300)
SG&A Costs $1,000,000 / Production 10,000 units ($100)
Profit Per unit $100
Operating Profit (8000 Units * $100) $800,000
2) Operating profit under variable costing
Sale price $ 500
Less
Variable and fixed production cost (200+100) ($300)
Contribution Per unit $200
Operating Profit (8000 Units * $200) $1600,000
3) Reconcilation Between Operating profits in Absorption Costing and Variable costing:
Profit as per Variable Costing $1600,000
Less:
SG&A Cost per unit of production
($1,000,000 / Production 10,000 units = $100 Per unit *8000 Units sold $800,000
Profit as per Variable costing $800,000
4) Fixed costs are generally known are period costs. They remain same for a period of time. and hence not relevent for decision making. Eg: You open a donut store, your rent paid will be a period cost. Now the rent cost will be same even if you sold one donut. So you need to see the variable cost of preparing donut.. That will be major driver.
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