5. Direct and absorption costing The information that follows pertains to Consum
ID: 2498310 • Letter: 5
Question
5. Direct and absorption costing
The information that follows pertains to Consumer Products for the year ended December 31, 20X6.
Inventory, 1/1/X6 24,000 units
Units manufactured 80,000
Units sold 82,000
Inventory, 12/31/X6 ? units
Manufacturing costs:
Direct materials $3 per unit
Direct labor $5 per unit
Variable factory overhead $9 per unit
Fixed factory overhead $280,000
Selling & administrative expenses:
Variable $2 per unit
Fixed $136,000
The unit selling price is $26. Assume that costs have been stable in recent years.
Instructions:
a. Compute the number of units in the ending inventory.
b. Calculate the cost of a unit assuming use of:
1. Direct costing.
2. Absorption costing.
c. Prepare an income statement for the year ended December 31, 20X6, by using direct costing.
d. Prepare an income statement for the year ended December 31, 20X6, by using absorption costing.
Explanation / Answer
Inventory, 1/1/X6 24,000 units
Units manufactured 80,000
Units sold 82,000
Inventory, 12/31/X6 = ( 24,000 + 80,000 - 82,000) = 22,000 units
Variable costing and absorption costing usually produce different net operating income figures. The reason is that the fixed manufacturing overhead cost is not treated the same way under two costing methods. To understand how the difference in treatment of fixed manufacturing overhead cost changes the net operating income figures of two costing systems,
Unit cost as per absorption costing is
Direct materials $3 per unit
Direct labor $5 per unit
Variable factory overhead $9 per unit
Fixed factory overhead $280,000 (280,0000/80,000) = 3.5
Total 20.5
Income Statement – Absorption Costing
Sales (82,000 units × $26)
$2,132,000
Cost of goods sold:
Beginning inventory (24,000 units × $20.5)
$492,000
Units manufactured this month (80,000 × $20.5)
$1,640,000
———-
Available for sale
$2,132,000
Ending inventory (22,000* × $20.5)
$451,000
———-
Cost of goods sold
$1,681,000
———-
Gross profit
$451,000
Marketing, general and administration expenses:
Variable (82,000units × $2)
$164,000
Fixed
$136,000
$300,000
———-
———-
Net operating income
151,000
In direct costing the differences between production and sales had no effect on net income.
Income Statement – Absorption Costing
Sales (82,000 units × $26)
$2,132,000
Cost of goods sold:
Variable expenses
———-
Cost of goods sold (17 * 80,000) + 280000
$1,640,000
———-
Contribution margin
$492,000
Marketing, general and administration expenses:
Variable (80,000units × $2)
$160,000
Fixed
$136,000
$296,0000
———-
———-
Net operating income
196,000
Sales (82,000 units × $26)
$2,132,000
Cost of goods sold:
Beginning inventory (24,000 units × $20.5)
$492,000
Units manufactured this month (80,000 × $20.5)
$1,640,000
———-
Available for sale
$2,132,000
Ending inventory (22,000* × $20.5)
$451,000
———-
Cost of goods sold
$1,681,000
———-
Gross profit
$451,000
Marketing, general and administration expenses:
Variable (82,000units × $2)
$164,000
Fixed
$136,000
$300,000
———-
———-
Net operating income
151,000
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