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Turquoise manufactures a single product; the standard costs per unit being variable manufacturing $8, fixed manufacturing...

Turquoise manufactures a single product; the standard costs per unit being variable manufacturing $8, fixed manufacturing $6. Selling and administrative costs are $2 per unit sold. The selling price is $20 per unit. Actual and budgeted overhead are the same for the year. Information about the company production activity for the year is:

Sales                            125,000 units

Units produced             150,000 units

Beginning Inventory      5,000 units

As part of the company cost planning and cost control of operations and activities, management is now reviewing its production activity and the potential impact of different stock-costing methods.

Required

  1. What is the value of closing inventory of finished goods under absorption costing?
  1. What is the difference in profit between absorption and variable costing and, for this specific year for this company, which of the two stock-costing methods has the higher profit and why?

Solutions

Expert Solution

Req a.
Value of ending invenotry under Absorption costing:
Unit Product cost under Absprtion costing:
Variable Manufacturing cost 8
Fixed Manufacturing cost 6
Unit Product cost under Absprtion costing: 14
Ending iinventory units:
Beginning inventory units 5000
Add: Produced 150000
Total Units available 155000
Less: Units sold 125000
Ending iinventory units: 30000
Value of Ending inventory under Absorption:
Ending inventory units 30000
Multiply: Unit product cost 14
Value of Ending inventory under Absorption: 420000
Req b.
Difference in Profits:
Increase in Inventory stock units (30000-5000) 25000
Multiply: Fixed Mfg cost deferred 6
Difference in Profits: 150000
The Profits under Absorption costing is higher as the fixed cost is defferred in Ending inventory

ekkarill92 answered 2 years ago
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