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

REQUIRED: (Show your detailed computations!)

a. Assuming the use of variable-costing, compute the cost of ending finished goods inventory.      

b. Assuming the use of absorption-costing, how much fixed selling and administrative cost would Webber include in the ending finished-goods inventory?

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

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

e. Reconcile the difference in operating income.

Answer 1

WORKING NOTES : 1
	beginning Inventory	-	Units
	Unit Produced =	60,000	Units
	Unit Sold (95% of 60,000)	57,000	Units
	Closing Stock	3,000	Units
	Selling price Per unit	$                                50
	Sales Value	$                 28,50,000
	Fixed Overhead recovery Rate =
	Fixed Manufacturing expenses	$                    6,00,000
	Divide by	"/" By
	Number of units Produced	$                       60,000
	Fixed Overhead recovery Rate =	$                          10.00	Per Units
WORKING NOTES : 2
	Calculation of cost of production units by using absorption and variable Costing
	Particulars	Absorption Costing Amount	Variable Costing Amount
	Direct Material Per unit ($ 240,000 / 60,000)	$                            4.00	$                            4.00
	Direct Labour Per Unit ($ 480,000 / 60,000)	$                            8.00	$                            8.00
	Vairable Manufacturing Overhead Per Unit ( $ 360,000 / 60,000)	$                            6.00	$                            6.00
	Fixed Manufacturing Overhead	$                          10.00	$                                 -
	Cost of Production per unit	$                          28.00	$                          18.00
SOLUTION = 1
	ABOSRPTION COSTING INCOME STATEMENTS	Absorption Costing
	Particulars	Amount
	Sales	$                 28,50,000
	Cost of Goods Sold
	Beginning inventory	$                                 -
	Cost of Goods Manufactured (60,000 X $ 28)	$                 16,80,000
	Less: Ending Inventory (3000 Units X $ 28)	$                       84,000
	Cost of Goods Sold	$                 15,96,000
	Gross Profit	$                 12,54,000
	Less : Selling and adminstrative Expenses
	Variable	$                    1,80,000
	Fixed	$                    6,30,000
	Net Income	$                    4,44,000
SOLUTION = 2
	VARIABLE COSTING INCOME STATEMENTS	Variable Costing
	Particulars	Amount
	Sales	$                 28,50,000
	Cost of Goods Sold
	Beginning inventory	$                                 -
	Cost of Goods Manufactured (60,000 X $ 18)	$                 10,80,000
	Less: Ending Inventory (3000 Units X $ 18)	$                       54,000
	Cost of Goods Sold	$                 10,26,000
	Variable Selling Expenses	$                    1,80,000
	Gross Profit	$                 16,44,000
	Fixed Expenses
	Less: Fixed Manufacturing overhead	$                    6,00,000
	Less : Fixed Selling Expenses	$                    6,30,000
	Net Income	$                    4,14,000
SOLUTION = 3
	Net Income as per Absorption Costin	$                    4,44,000
	Less: Net income as per Variable Costing	$                    4,14,000
	Difference	$                       30,000
	Differene in due Fixed overhead included in ending inventory under absorption costing
	Ending inventory	3,000	Units
	X By	"X" By
	Fixed Overhead cost per unit inluded in absorption Costing	$                          10.00
	Difference = (AXB)	$                       30,000