Question

ABSORPTION AND VARIABLE (DIRECT) COSTING
Facer Electronics produces high quality cellphone charging cords, and in the 2016 calendar year, it produced 9000 saleable charging cords. In the same year, the company achieved sales of 11,000 charging cords, at a per unit sales price of $18. The firm had 3000 cords in stock on 1 January 2016. Facer Electronics uses normal costing and a standard costing system. Normal volume of production was the same for the last three years.

Fixed manufacturing overhead costs for the year were budgeted at $30,000 and these costs were allocated at a rate of $3/charging cord. Other manufacturing costs were $5 per cord for direct materials, $3 per cord for direct labour and $2 per cord for other variable manufacturing costs. Marketing and administration costs for 2016 amounted to $10,000 in fixed costs, and $2 per cord sold.  

Required:  

(a) Prepare an absorption costing income statement for Facer Electronics for the calendar year of 2016. Assume that there are no taxes, or price, spending or efficiency variances.
(b) What would be the 2016 profit under the variable (direct) costing method? Explain why your profit in (a) and (b) are the same or different.

Answer 1

Construct The Absorption Costing Unit Product Cost
Direct Material				5
Direct labour				3
Variable Manufacturing overheads				2
Fixed Manufacturing overheads				3.33	(30000/9000)
Absorption costing unit prroduct cost				13.33
Construct the Absorption Costing Income Statement Under FIFO
Sales				$198,000
Cost of Goods sold				146630
Gross Margin				$51,370
Selling and distribution expense				32,000
Net operating income				19,370
Compute the Variable costing Unit Product cost
Direct Material				5
Direct labour				3
Variable Manufacturing overheads				2
Variable costing unit prroduct cost				10
Construct The Variable Costing Income Statement under FIFO
Sales					198,000
Less: Variable cost
variable cost of goods sold				110,000
Variable selling expense				22,000	132,000
Contribution margin					66,000
Fixed expense:
Fixed Manufacturing overheads					30,000
Fixed selling expense					10,000
Net operating Income					26,000
Difference in incomes:
Due to units produced is lesser than units sold.
Therefore, ending inventory is lesser than beginning inventory.
Fixed overheads has been released for 2000 units in absorption costing @ 3.33 per unit
Therefore, the income under absorption costing is decreased by $ 6660 (i.e. 2000 units @3.33)