Question

A company that uses a FIFO inventory system and began operations in Year 1 has the following information. Year 1 Year 2 Sales units 8,000 10,000 Selling price $45 $46 Production units 12,000 8,000 Unit direct material cost $2.00 $2.00 Unit direct labor cost $1.00 $1.00 Unit commission cost $.50 $.50 Annual Fixed Overhead $180,000 $180,000 Annual Fixed S,G,&A $140,000 $150,000 1. What are the inventoriable cost per unit in years 1 and 2? Absorption Costing Variable Costing 2. What would the income statements look like? Absorption Costing Variable Costing Numerically reconcile the difference in Operating Profit (if any)

I know this question has already been asked...…. But I cannot follow where the numbers come from. I am assuming the issue is the change in inventory? I need to know how year two is calculated with more detail for both methods

Also note for my exams I have to use paper and pencil ….. I have no excel access

Answer 1

……. Company
Income Statement (Absorption Costing)
For the 1 Year
Sales (8,000 units @ $45)		$360,000
Less: Cost of Goods Sold:
Opening Inventory	0
Add: Cost of Goods Manufactured
(12,000 units @ $18 per unit)	2,16,000
Cost of goods available for sale	2,16,000
Less: Ending Inventory:
(4,000 units @ $18)	72,000	$144,000
Gross Profit		$216,000
Less: Selling & Adm. Expense
Variable Commission( 8000× $ 0.5)	$4,000
Fixed Selling & Adm.	$140,000	$144,000
Net Operating Income		$72,000
Inventoriable Cost
Absorption Cost = DM + DL + Fixed MOH
Absorption Cost = 2.00 + 1.00 + 15* = $18
Fixed MOH per unit = 180,000 ÷ 12,000 units= $15*/unit

……. Company
Income Statement (Variable Costing)
For the 1 Year
Sales (8,000 units @ $45)		$360,000
Less: Cost of Goods Sold:
Opening Inventory	0
Add: Variable Cost of Goods Manf.
(12,000 units @ $3 per unit)	$36,000
Var. Cost of goods available for sale	$36,000
Less: Ending Inventory:
(4,000 units @ $3)	$12,000	$24,000
Gross Contribution Margin		$336,000
Less: Variable Commission
( 8,000× $ 0.5)		$4,000
Contribution Margin		$332,000
Less: Fixed Expense
Fixed MOH	$180,000
Fixed Selling & Adm.	$140,000	$320,000
Net Operating Income		$12,000
Inventoriable Cost:
Variable Cost of goods sold per unit = DM + DL
Variable Cost of goods sold per unit = 2.00 +1.00 = 3.00

Reconciliation for 1 Year (Absorption costing vs. Variable Costing Profit)
Net operating Income under Absorption Costing		$72,000
Less: Fixed Manufacturing Overhead deferred
in Inventory (4,000 units× $ 15 per unit)		$60,000
Net operating Income under Variable Costing		$12,000

……. Company
Income Statement (Absorption Costing)
For the 2 Year
Sales (10,000 units @ $46)		$460,000
Less: Cost of Goods Sold:
Opening Inventory (4,000 × $18)	$72,000
Add: Cost of Goods Manufactured
(8,000 units @ $25.5 per unit)	$204,000
Cost of goods available for sale	$276,000
Less: Ending Inventory:
FIFO: ( 2,000 units @ $25.5)	$51,000	$225,000
Gross Profit		$235,000
Less: Selling & Adm. Expense
Variable Commission ( 10,000 × $ 0.5)	$5,000
Fixed Selling & Adm.	$150,000	$155,000
Net Operating Income		$80,000
Inventoriable Cost:
Absorption Cost = D.M + D.L + Fixed M.O.H
Absorption Cost = 2.00 + 1.00 + 22.50* = $25.5
Fixed MOH per unit = 180,000 ÷ 8,000 units= $22.50*/unit

……. Company
Income Statement (Variable Costing)
For the 1 Year
Sales (10,000 units @ $46)		$460,000
Less: Cost of Goods Sold:
Opening Inventory (4,000 × $ 3)	$12,000
Add: Variable Cost of Goods Manf.
(8,000 units @ $3 per unit)	$24,000
Var. Cost of goods available for sale	$36,000
Less: Ending Inventory:
(2,000 units @ $3)	$6,000	$30,000
Gross Contribution Margin		$430,000
Less: Variable Commission
( 10,000× $ 0.5)		$5,000
Contribution Margin		$425,000
Less: Fixed Expense
Fixed MOH	$180,000
Fixed Selling & Adm.	$150,000	$330,000
Net Operating Income		$95,000
Inventoriable Cost:
Variable Cost of goods sold per unit = DM + DL
Variable Cost of goods sold per unit = 2.00 +1.00 = 3.00