Question

Dennison Corporation has provided the following information:

Direct Materials $6.00 per unit

Direct Labor $3.00 per unit

Variable MOH $2.00 per unit

Sales Commission $1.00 per unit

Variable Administrative expenses $0.50

Total Fixed MOH $10,000

Total Fixed Selling and administrative expenses $5,000

5,000 units were produced and 4,900 units were sold.

There was no beginning inventory. ANSWER THE FOLLOWING QUESTIONS 1. What is the unit product cost under variable costing? 2. What is the unit product cost under absorption costing? 3. Which method of product costing will show a higher net operating income under the circumstances above, and by how much? 4. Explain how you arrived at your answer.

Answer 1

Compute the Variable costing Unit Product cost
				Amount $
Direct Material			6
Direct labour			3
Variable Manufacturing overheads	2
Variable costing unit prroduct cost	11
Construct The Absorption Costing Unit Product Cost
				Amount $
Direct Material			6
Direct labour			3
Variable Manufacturing overheads	2
Fixed Manufacturing overheads		2.00	(10000/5000)
Absorption costing unit prroduct cost	13.00
As there is an increase in Ending inventory units,
Therefore, the income under absorption costing will be higher by $200 for the amount of
fixed manufacturing overheads deferred during the year
Thus,
Income under absorption costing is higher by $ 200.
Req 4.
Number of units of Ending inventory (5000-4900)	100
Multiply: Fixed Manufacturing Oh per unit (10000/5000)	2
Net Income under absorption costing higher by:	200