Question

ABSORPTION COSTING VERSUS THROUGHPUT COSTING
The book The Goal illustrates the concept of throughput costing. For the problem below
prepare all journal entries and determine the impact on the income statement of the
differences between absorption costing (normal accounting) and throughput costing.
HINT: pay very careful attention to definitions of throughput, inventory and operating
expense from the book
BUDGETED MANUFACTURING COSTS
DIRECT MATERIAL				$                 20	PER UNIT
DIRECT LABOR				$                   2	PER UNIT
VARIABLE OVERHEAD				$                 10	PER UNIT
FIXED OVERHEAD				$      150,000
YEAR 1
NO BEGINNING INVENTORY
ACTUAL COSTS OF PRODUCTION EQUALS ABOVE MANUFACTURING COSTS
PURCHASE DIRECT MATERAILS OF				$      200,000
INCUR SELLING AND ADMIN COSTS OF				$        80,000
#UNITS PRODUCED				10000
# UNITS SOLD				9000
SALES PRICE OF UNITS SOLD				$              100
YEAR 2
THERE IS BEGINNIN GINVENTORY
ACTUAL COSTS OF PRODUCTION EQUALS ABOVE MANUFACTURING COSTS
PURCHASE DIRECT MATERAILS OF				$      160,000
INCUR SELLING AND ADMIN COSTS OF				$        80,000
#UNITS PRODUCED				8000	UNITS
# UNITS SOLD				9000	UNITS
SALES PRICE OF UNITS SOLD				$              100
2. CALCULATE THE NET INCOME FOR BOTH YEARS UNDER BOTH COSTING METHODS

Answer 1

1	Absorption costing	1st year	2nd year
	Direct material	20	20
	Direct labor	2	2
	Variable manufacturing overheads	10	10
	Fixed manufacturing	15	18.75
	Total product cost	47	50.75
	Units produced	10000	8000
	Units sold	9,000	9,000
	Income statement
	Sales revenue	900000	900000
	cost of goods sold
	Beginning inventory	0	47000
	cost of goods manufactured	470000	406000
Add	Goods available for sale	470000	453000
	Ending inventory	47000	0
Less	Cost of goods sold	423000	453000
	Gross profit	477000	447000
	Selling and admin expenses
Less	Variable selling and admin expense
	Fixed Admin expense	80000	80000
	Total Selling and admin expenses	80000	80000
	Net operating income	397000	367000
	Variable costing	1st year	2nd year
	Direct material	20	20
	Direct labor	2	2
	Variable manufacturing overheads	10	10
	Product cost per unit	32	32
	Units manufactured	10000	8000
	Units sold	9,000	9,000
	Income statement
	Sales revenue	900000	900000
Less	Variable expense
	Variable cost of goods sold	288000	288000
	Total variable expense	288000	288000
	Contribution margin	612000	612000
Less	Fixed cost
	Fixed manufacturing expense	150000	150000
	Fixed Admin expense	80000	80000
	Total fixed expenses	230000	230000
	Net operating income	382000	382000