Question

Webber, Inc., began operations at the start of the current year, having a production target of 60,000 units. Actual production totaled 60,000 units, and the company sold 95% of its manufacturing output at $50 per unit. The following costs were incurred:

Manufacturing:

Direct materials used $240,000

Direct labor 480,000

Variable manufacturing overhead 360,000

Fixed manufacturing overhead 600,000

Selling and administrative:

Variable $180,000

Fixed 630,000

a. Compute the company’s absorption-costing operating income.

b. Compute the company’s variable-costing operating income.

c. Reconcile the difference in operating income.

Answer 1

Requirement:A

Webber, Inc.
Absorption Costing Income Statement
Sales Revenue		$    2,850,000
Less: COGS
Direct Materials [240000*95%]	$           228,000
Direct Labors [480000*95%]	$           456,000
Variable Manufacturing Overhead [360000*95%]	$           342,000
Fixed Overhead Costs (600000*95%)	$           570,000
Cost of goods sold		$    1,596,000
Gross margin		$    1,254,000
Selling general and Administrative Costs
Variable Selling and Administrative Costs [180000*95%]	$           171,000
Fixed Selling and Administrative Costs	$           630,000
Totals Selling, General and Administrative Costs		$        801,000
Net Income/ [loss]		$        453,000

Requirement:B

Webber, Inc.
Variable Costing Income Statement
Sales Revenue		$    2,850,000
Less: Variable Costs
Direct Materials [240000*95%]	$           228,000
Direct Labors [480000*95%]	$           456,000
Variable Manfacturing Overhead [360000*95%]	$           342,000
Variable Selling and Administrative Costs [180000*95%]	$           171,000	$    1,197,000
Contribution Margin[Sales - Variable Cost]		$    1,653,000
Less: Fixed Costs
Fixed Manufacturing Overhead	$           600,000
Fixed Selling and Administrative Costs	$           630,000
		$    1,230,000
Net Income/[loss] [Contribution Margin-Fixed Cost]		$        423,000

Requirement:C

Reconciliation of Variable Costing and Absorption Costing Net Operating Incomes
Variables costing net operating income	$           423,000
Add: Fixed Overhead in Ending Inventory [600000*5%]	$              30,000
Absorption costing net operating income	$           453,000