Question

Turquoise manufactures a single product; the standard costs per unit being variable manufacturing $8, fixed manufacturing $6. Selling and administrative costs are $2 per unit sold. The selling price is $20 per unit. Actual and budgeted overhead are the same for the year. Information about the company production activity for the year is: Sales 125,000 units Units produced 150,000 units Beginning Inventory 5,000 units As part of the company cost planning and cost control of operations and activities, management is now reviewing its production activity and the potential impact of different stock-costing methods.

Required a) What is the value of closing inventory of finished goods under absorption costing?

b) What is the difference in profit between absorption and variable costing and, for this specific year for this company, which of the two stock-costing methods has the higher profit and why?

Answer 1

	Computation of Unit Product cost(Note)
	Units Produced	150000	units
	Variable Manufacturing overhead per unit	$                    8.00
	Fixed Manufacturing overhead per unit	$                    6.00
	Cost of goods manufactured per unit	$                  14.00
	Total Cost of goods manufactured	$           2,100,000
	Turquoise Manufacture
	Income Statement as per Absorption Costing
	Sales(125000 units*$20)		$      2,500,000
	Less:Cost of goods sold:
	Opening Inventory(5,000*$14)	$                70,000
	Add:Cost of goods manufactured(Note)	$           2,100,000
	Cost of goods available for sale	$           2,170,000
	Less:Closing Inventory[(5,000+150,000-125,000)*$14]	$              420,000	$      1,750,000
	Gross Profit		$         750,000
	Less:Selling and admin expenses(125,000*$2)		$         250,000
	Net Operating Income / (Loss)		$         500,000
	Computation of Unit Product cost
	Variable Manufacturing overhead per unit	$                    8.00
	Unit Product Costs	$                    8.00
	Turquoise Manufacture
	Income Statement as per Variable Costing
	Sales		$      2,500,000
	Variable cost of goods sold:
	Opening Inventory(5,000*$8)	$                40,000
Add:	Variable cost of goods manufactured(150000*$8)	$           1,200,000
Less:	Inventory, Closing(30000*$8)	$              240,000
	Total Cost of goods sold		$      1,000,000
	Manufacturing Margin		$      1,500,000
	Variable selling and administrativ expenses(125000*$2)		$         250,000
	Contribution Margin		$      1,250,000
	Total Fixed Costs(150,000*$6)		$         900,000
	Operating Income		$         350,000
	Reconciliation Statement
		Current Month
	Net Income under Variable costing	$              350,000
	Add:Fixed Manufacturing Overhead in Ending Inventory($900,000/150000)*30000	$              180,000
	Less:Fixed Manufacturing Overhead in Opening Inventory($900,000/150000)*5000	$               -30,000
	Absorption Costing Net Operating Income	$              500,000
	So in this Year Absorption costing has Higher Profit as the Production is higher than the Sales and the closing Inventory under Absorption costing
	is also higher than closing inventory uner variable costing