Question

Winslow Manufacturing Company has the following unit data:

Sales price                                                       $600.00

Direct materials                                                   250.00

Direct labor                                                         150.00

Variable overhead                                                 35.00

Fixed overhead (based on 8,000 units)                 30.00        

Marketing and administrative costs:              

Variable                                                                 25.00

Fixed (based on 8,000 units)                                15.00

8,000 units were produced. There were no units in beginning Finished Goods Inventory and 1,500 units in ending Finished Goods Inventory.

Required:

1. Compute the unit product using absorption costing and variable costing.
2. Prepare an income statement using variable costing.
3. Prepare an income statement using absorption costing.
4. Explain the difference in operating income for the absorption and variable costing approaches.

Answer 1

A)
	Absorption Costing	Variable Costing
Direct materials	250	250
Direct labor	150	150
Variable overhead	35	35
Fixed overhead (based on 8,000 units)	30
Total Unit Product	465	435
B)
Winslow Manufacturing Company
Income Statement under Variable Costing
Sales (8000 -1500) x $600	$                            39,00,000.00
Variable expenses:
Variable cost of goods sold ($435 x 6500 units)	$                            28,27,500.00
Variable selling and administrative expenses (6500 units x $25)	$                              1,62,500.00
Contribution margin	$                              9,10,000.00
Fixed expenses:
Fixed manufacturing overhead (8000 x $30)	$                              2,40,000.00
Fixed selling and administrative expenses (8000 x $15)	$                              1,20,000.00
Net operating income	$                              5,50,000.00
c)
Winslow Manufacturing Company
Income Statement under Absorption Costing
Sales (8000 -1500) x $600	$                            39,00,000.00
Cost of goods sold (6500 x $465)	$                            30,22,500.00
Gross margin	$                              8,77,500.00
Selling and administrative expenses
Variable selling and administrative expenses (6500 units x $25)	$                              1,62,500.00
Fixed selling and administrative expenses (8000 x $15)	$                              1,20,000.00
Net operating income	$                              5,95,000.00
d)
Reconciliation of Variable Costing and Absorption Costing Net Operating Incomes
Net operating income under variable costing	$                              5,50,000.00
Add:Fixed manufacturing overhead costs deferred in inventory under absorption costing (8000-1500) x 30	$                                 45,000.00
Net operating income under absorption costing	$                              5,95,000.00