Question

The Light Company manufactures a single product. The following data is available for 2017:

            Selling price………..................................$131

            Units in beginning inventory……………….0

            Units produced………………………….6,300

            Units sold……………………………….5,400

Units in ending inventory………………   900   

Variable costs per unit:

               Direct materials…………..                 $ 65.00

               Direct labor………………..                $ 30.00

               Variable manufacturing overhead        $   0.00

               Variable selling/administrative           $   7.00

Fixed costs:

               Fixed manufacturing overhead:           $75,600

           

REQUIRED: Please prepare an absorption costing and a variable costing income statement. Please reconcile the difference in net income between the two approaches and explain what accounts for the difference.

Answer 1

Cost Sheet as per Absorption Costing
	Cost Per Unit	Quantity	Total
Direct Material	65	6300	409500
Direct Labour	30	6300	189000
Direct Exp	0	0	0
Prime Cost			598500
Add: Production Overhead
Factory Overhead			75600
Factory Cost			674100
Add: Administrative Overhead	7	6300	44100
Cost of Goods Manufactured			718200
Add: Opening Finished Goods			0
Less: Closing Finished Goods	114	900	102600
Cost of Finished Goods Sold			615600
Selling and Distribution Overhead	0	0	0
Cost of Goods Sold			615600
Profit			91800
Sales	131	5400	707400
Variable Costing
Sales	131	5400	707400
Less: Variable Cost	102	5400	550800
Contribution			156600
Less: Fixed Cost			75600
Profit			81000
Profit as per Absorption costing is 91800 whereas profit as per Variable costing is 81000. There is difference
between 10800 due to we take raw material consumed (i.e 6300 units)in abosrption costing but in variable costing we take
unit sold(5400 units) as a base. In Absorption costing overall costing is calculated whereas in variable costing only the units sold
costing is considered.Abosrption costing includes fixed cost whereas Variable costing includes only direct cost.