Question

Given the following information:

	Prior Year (Budget and Actual)	Current Year (Budget and Actual)
Beginning Inventory (Units)	0	?
Sales (Units)	600,000	575,000
Manufactured (Units)	600,000	640,000
Selling Price ($/unit)	9.90	10.00
Variable Manufacturing Cost ($/unit)	4.80	5.00
Total Fixed Manufacturing Costs ($)	1,560,000	1,600,000
Variable Selling Cost ($/unit)	1.00	1.00
Total Fixed SG&A Costs ($)	351,000	358,000

Other information:

• The manufacturer uses FIFO.
• All Variable costs are direct costs

Required:

1. Prepare an income statement for the Current Year based on Variable Costing.

2. Prepare an income statement for the Current Year based on Absorption Costing.

3. Reconcile the difference in Net Income between Variable Costing and Absorption Costing for the current year.

4. Near the very end of the fiscal year, the production manager noted that if Net Income increases by $200 they will get a big bonus. How can the production manager increase Net income using Absorption costing even though no additional units will be produced?

Answer 1

4) By selling the ending inventory , you will increase the net income using the absorption costing even though no additional units will be produced (it means if sell the ending inventory the fixed manufacturing overhead will be released from inventory so the profit will be increased )

if you sell all the production units then the absorption costing income will be increased

when sold 575000 units the absorption costing income is $504,500

when you sell the 640000 units the absorption costing net income is $ 602000

so absorption costing income will be increased without producing additional units