Question

Q3: You are given the following information about ABC Company for year 2017 and you are required to compute net operating income using both absorption and variable costing with your comment on results.

Number of units produced	30,000
Number of units sold	25,000
Units in begging inventory	0
Units sales price	SR 40
Variable costs per units
Direct material	SR7
Direct labor	SR5
Manufacturing overhead	SR3
Selling and administrative expenses	SR 5
Fixed expenses per year:
Manufacturing overhead	SR 150,000
Selling and administrative expenses	SR 100,000

Answer:

Answer 1

				Absorption	Variable
	Direct materials			7	7
	direct labor			5	5
	variable overhead			3	3
	fixed overhead (150,000/30,000)			5
	unit product cost			20	15
	Absorption costing
	Sales	(25000*40)			1000000
	Cost of goods sold		(25000*20)		500000
	Gross margin				500000
	Selling and administrative expense
	Variable selling & adm expense			125000
	fixed selling & adm expense			100,000	225,000
	Net operating income				275,000
	Variable costing
	Sales				1000000
	Variable expenses
	Variable cost of goods sold			375000
	Selling and administrative exp			125,000
	Total variable expense				500,000
	Contribution margin				500,000
	Fixed expense
	fixed manufacturing overhead			150,000
	Fixed selling and administrative			100,000	250,000
	Net operating income				250,000
	Comments:
	the income under variable costing is less than absorption costing
	as under absorption costing fixed overhead is deferred in ending
	inventory