Question

Q1. Bayblo has incurred the following costs to make 200,000 units during the month of December. Rials Materials 500,000 Direct labor 200,000 Variable manufacturing overhead 60,000 Variable selling and administrative costs 90,000 Fixed manufacturing overhead 400,000 Fixed selling and administrative costs 400,000 Bayblo’s December 1st inventory consisted of 20,000 units valued at RIALS 116,000 using absorption costing. Total fixed costs and variable costs per unit have not changed during the past few months. In December, Bayblo sold 210,000 units at RIALS 20 per unit.

REQUIRED: 1. Using absorption costing, calculate the following.

a. Bayblo’s December manufacturing cost per unit

b. Bayblo’s December 30 inventory value c. Bayblo’s December net income.

2. Using variable costing, calculate the following.

a. Bayblo’s December manufacturing cost per unit.

b. Bayblo’s December 30 inventory value. c. Bayblo’s December net income.

3. Identify and explain the reason/s why the income calculated in the previous two questions might differ.

Answer 1

Absorption costing approach
Part 1
Direct Materials	500,000
Direct Labour	200,000
Prime cost------------------------------(A)	700,000
Variable manufacturing overhead	60,000
Fixed manufacturing overhead	400,000
OH Costs -------------------------------(B)	460,000
Total costs (A+B) =C	1,160,000
Units manufactured----------------------D	200,000
Manufacturing cost per unit = [C/D] Answer for (a)-----------------------------	6
Answer for (b)
Opening inventoy	20,000
Manufactured units	200,000
Sold units	(210,000)
Closing inventory (Sum of above)	10,000
Manufacturing cost per unit = [C/D] (from above part (a))	5.80
Clsoing stock value	58,000
Answer for (c)
Sales (210000*20)----------------------A	4,200,000
Cost of goods sold
Opening stock	116,000
Goods maufactured	1,160,000
(200000*5.8)
Closing stock (from above part b)	(58,000)
Cost of goods sold----------------------B	1,218,000
Selling oveheads
Variable	90,000
Fixed	400,000
Selling oveheads-------------------------C	490,000
Net income (A-B-C)	2,492,000

Variable costing approach
Part 2
Direct Materials	500,000
Direct Labour	200,000
Prime cost------------------------------(A)	700,000
Variable manufacturing overhead	60,000
OH Costs -------------------------------(B)	60,000
Total costs (A+B) =C	760,000
Units manufactured----------------------D	200,000
Manufacturing cost per unit = [C/D] Answer for (a)-----------------------------	3.80
Answer for (b)
Opening inventoy	20,000
Manufactured units	200,000
Sold units	(210,000)
Closing inventory (Sum of above)	10,000
Manufacturing cost per unit = [C/D] (from above part (a))	4
Clsoing stock value	38,000
Answer for (c)
Sales (210000*20)----------------------A	4,200,000
Cost of goods sold
Opening stock	116,000
Goods maufactured	760,000
(200000*3.8)
Closing stock (from above part b)	(38,000)
Cost of goods sold----------------------B	838,000
Less: Variable and Selling expense	90,000
Contribution margin (A-B) = C	3,272,000
Fixed expenses
Manufacturing	400,000
Selling	400,000
Fixed expenses-------------------------D	800,000
Net income (C- D)	2,472,000

Part 3:

Reasons for difference:

Under absorption costing Fixed manufacturing overheads form part of manufacturing cost, whereas under variable costing it is not the case. Pls see below for reconciliation of profits under both the methods:

Net income under variable costing	2,472,000
Fixed Manufacturing Overheads deferred in inventory (10000*2) [5.8-2.8 =2]	20,000
Net income under absoprtion costing	2,492,000