Question

Figure 8-5. Sanders Company has the following information for last year: Selling price $190 per unit Variable production costs $52 per unit produced Variable selling and admin. expenses $18 per unit sold Fixed production costs $240,000 Fixed selling and admin. expenses $180,000 Units produced 12,000 Units sold 7,000 There were no beginning inventories.

1. Refer to Figure 8-5. What is the value of ending inventory for Sanders using the absorption costing method? a. $360,000 b. $280,000 c. $220,000 d. $380,000

2. Refer to Figure 8-5. What is the income for Sanders using the absorption costing method? a. $520,000 b. $480,000 c. $1,200,000 d. $500,000

3. Refer to Figure 8-5. What is the cost of ending inventory for Sanders using the variable costing method? a. $300,000 b. $280,000 c. $120,000 d. $260,000

4. Refer to Figure 8-5. What is the income for Sanders using the variable costing method? a. $420,000 b. $480,000 c. $520,000 d. $500,000

Answer 1

Question 1

Correct Answer—(a) $360000

Question 2

Correct Answer ---(a) $520,000

Question 3

Correct answer---- (d) $260,000

Question 4

Correct answer--- (a) $420,000

Working Notes

Fixed cost allocation to Cost of goods sold and Ending Inventory under Absorption costing
Total Fixed production cost	$ 240,000.00
Units Produced	12000
Cost per unit produced	$            20.00
Fixed cost assigned to goods sold (20 x 7000)	$ 140,000.00
Fixed cost assigned to Ending Inventory (20 x 5000)	$ 100,000.00

Ending Inventory as per Absorption costing
Units	5000
Variable production cost per unit	$            52.00
Fixed cost per unit assigned	$            20.00
Total cost per unit	$            72.00
Total ending Inventory	$ 360,000.00

Income Statement
Absorption costing
Sales	$ 1,330,000.00
Cost of Goods sold	$      504,000.00
Gross profit	$      826,000.00
Selling and Administrative expenses	$      306,000.00
Net Operating Income	$      520,000.00

Selling and admin expenses are both fixed and variable are reported together.

Ending Inventory as per Variable costing
Units	5000
Variable production cost per unit	$                            52.00
Total ending Inventory	$                 260,000.00

Income Statement
Variable Costing
Sales Revenue	$ 1,330,000.00
Variable cost
Variable production cost	$      364,000.00
Variable selling expenses	$      126,000.00
Total Variable cost	$      490,000.00
Contribution margin	$      840,000.00
Fixed Production cost	$      240,000.00
Fixed selling expenses	$      180,000.00
Total Fixed cost	$      420,000.00
Net income	$      420,000.00

Under absorption costing fixed production cost is allocated to products produced in total, on the other hand in variable costing fixed production cost is taken as a period cost and not allocated to product.