Ramon Co reported the following units of production and sales for June and July
ID: 2521047 • Letter: R
Question
Ramon Co reported the following units of production and sales for June and July 2014:
Produced Sold
June 2014 100000 90000
July 2014 100000 105000
Net income under absorption costing for June was $40000, net income under variable costing for July was $50000. fixed manufacturing costs were $600000 for each month. Ramon Co uses actual costing.
How much was net income for July using absorption costing
A. $50000
B $20000
C $80000
D $40000
What is the answer to this problem and please explain in detail how you came up with the answer. I do not understand how to come up with the answer without going through a whole absorption costing income statement. Thank you
Explanation / Answer
Answer:
Correct answer is:
B. $20,000
Explanation:
In variable costing fixed costs are treated as period costs and hence therefore not included in product cost. Finished goods inventory under variable costing method are valued at variables costs only.
Whereas in absorption costing manufacturing fixed costs are treated as product costs. Finished goods inventory will have manufacturing fixed costs also factored in.
Given Fixed cost = $600,000
Units produced = 100,000
Fixed cost per unit = $600,000 / 100,000 = $6
In July units produced are 100,000 and units sold are higher at 105,000. The units sold are higher by 5000 units. The net income under variable costing systems is always higher than absorption costing system when inventory decreases.
These 5000 units (drawn from opening stock of July) cost of which will include fixed cost portion of (5,000 * $6 =) $30,000.
As such, when net income under variable cost from July = $50,000,
Net income under absorption costing will be lower by $30,000 = ($50,000 - $30,000) = $20,000
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