Question

ABC Inc., began the year with 10,000 units in stock but finished with 5,000 units. It produced 45,000 units for the period. Its selling price is $12 per unit, variable manufacturing cost is $5 per unit, and variable selling is $3 per unit. Fixed manufacturing and selling costs are $100,000 and $72,000 respectively. The firm notes that variable cost per unit (both mfg and SGA) was the same this and the prior year. What is the income under variable costing?

2. Refer to the prior problem. The firm informs you that inventory values under absorption costing decreased by $39,000. Compute (Income as reported under variable costing - Income as reported under absorption costing), noting that it is change in FMOH between the opening and closing inventory accounts.

Answer 1

Answer:

1)

Sales units =  Op st + production-Cl st = 10,000 u+45,000 u-5,000 u = 50,000 u

• Sales = 50,000 u*$ 12 selling price = $ 6,00,000

Calculation of income under variable costing:

Particulars	Amount	Amount
Variable manufacturing cost	= Units produce during the year * Variable manu cost = 45,000 u * $ 5 = $ 2,25,000	$ 2,25,000
Less: Closing stock	= 5,000 u * $ 5 = $ 25,000	$ 25,000
Cost of goods produced	$ 2,25,000 - $ 25,000 = $ 2,00,000	$ 2,00,000
Add: Var selling and admin exp	= Total sales units * var selling and admini exp = 50,000 u * $ 3 = $ 1,50,000	$ 1,50,000
Variable cost of goods sold	$ 2,00,000 + $ 1,50,000 = $ 3,50,000	$ 3,50,000
Contribution	= Sales - Variable cost of goods sold = $ 6,00,000 - $ 3,50,000 = $ 2,50,000	$ 2,50,000
Less: Fixed exp& selling exp	$ 1,00,000 + $ 72,000 = $ 1,72,000	$ 1,72,000
Income under variable costing	= $ 2,50,000 - $ 1,72,000 = $ 78,000	$ 78,000

Therefore,Income under variable costing is $ 78,000.

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2)

Sales units =  Op st + production-Cl st = 10,000 u+45,000 u-5,000 u = 50,000 u

• Sales = 50,000 u * $ 12 selling price = $ 6,00,000

Calculation of Income under absorption costing :

Particulars	Amount	Amount
Variable manu exp	= 45,000 * $ 5 = $ 2,25,000	$ 2,25,000
Add: Fixed manu exp	Given	$ 1,00,000
Cost of goods produced	= $ 2,25,000 + $ 1,00,000 = $ 3,25,000	$ 3,25,000
Less: Closing stock	Given	$ 39,000
Cost of goods sold	$ 3,25,000 - $ 39,000 = $ 2,86,000	$ 2,86,000
Add: Var selling exp	= 50,000 u * $ 3 = $ 1,50,000	$ 1,50,000
Fixed selling exp	given	$ 72,000
Total cost	$ 2,86,000 + $ 1,50,000 + $ 72,000 = $ 5,08,000	$ 5,08,00
Income under absorption cost	= Sales - Total cost = $ 6,00,000 - $ 5,08,000 = $ 92,000	$ 92,000

Therefore, income under absorption cost is $ 92,000