Electricoil is a division of Meier Products Corporation. The division manufactur

Question

Electricoil is a division of Meier Products Corporation. The division manufactures and sells an electric coil used in a wide variety of applications. During the coming year, it expects to sell 200,000 units for $9 per unit. Mark Banes is the division manager. He is considering producing either 200,000 or 250,000 units during the period. Other information is presented in the schedule on for 201 Division Informati Beginning inventory Expected sales in units Selling price per unit Variable manufacturing costs per unit Fixed manufacturing overhead costs (total) Fixed manufacturing overhead costs per unit: 0 200,000 $3 $500,000 Based on 200, units Based on 250, units $2.50 per unit ($50,000 ÷ 200,000) $2.00 per unit ($500,000 250,000) Manufacturing costs per unit: $5.50 per unit ($3 variable + $2.50 fixed) $5.00 per unit ($3 variable$2.00 fixed) $0.40 $15,000 Based on 200, units Based on 250, units Variable selling and administrative expense Fixed selling and administrative expense (total) Instructions (a) Prepare an absorption costing income statement, with one column showing the results if 200 units are (b) Prepare a variable costing income statement, with one column showing the results if 200,000 units are (c) Reconcile the differences in net incomes under the two approaches and explain what accounts for this produced and one column showing the results if 250,000 units are produced produced and one column showing the results if 250,000 units produced difference.

Explanation / Answer

(a)

(b)

(c)

The only difference in calculating cost of a unit under absorption & variable costing is treatment of fixed manufacturing overhead. Under absorption costing the same is included in calculating cost of a unit while in variable costing it is directly expensed out and not included in the cost of a unit.

Hence, it the closing stock is nil, operating income under both the methods will be same. This can be seen from above calculation.

However, if production is more than sales, valuation of closing stock will cause difference.

Reconciliation of net income under absaorption costing & variable costing:

Income Statement under absorption costing Units produced 200,000 Units produced 250,000 Sales     18,00,000          18,00,000 Less: Cost of Goods Sold: - Variable mfg. cost        6,00,000         7,50,000 - Fixed mfg. o/h cost        5,00,000         5,00,000     11,00,000       12,50,000 Ending Inventory                     -       11,00,000       (2,50,000)          10,00,000 Gross Margin        7,00,000            8,00,000 Less: Selling & Admin Cost: - Fixed           15,000             15,000 - Variable           80,000           95,000             80,000                95,000 Net Operating Margin        6,05,000            7,05,000

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