Question

WayFast Company has just opened a new plant to produce a folding camp cot. Below are the data obtained during the first month of the plant’s operation in April:

Units produced 1,000

Units sold 800

Unit selling price $200

Unit variable selling expense $4

Total fixed selling expense $24,000

Unit direct materials cost $35

Unit direct labour cost $27

Unit variable MOH $6

Total fixed MOH $20,000

How much is the net income under variable costing in April compared with that under absorption costing?

Answer 1

The difference between Variable costing & absorption costing is that under variable costing all the fixed manufacturing overheads are charged in the period they occur and under absorption costing the fixed manufacturing overheads are charged on the basis of no of units sold and rest are charged to the closing stock.

Income Statement under Variable Costing Method:

Particulars		Amount
Sales Revenue (800 units *$200 per unit)		$160,000
Marginal cost of sales
Direct Material (800 units *$35 per unit)	$28,000
Direct Labor (800 units *$27 per unit)	$21,600
Variable MOH (800 units *$6 per unit)	$4,800
Variable selling exp (800 units *$4 per unit)	$3,200	$57,600
Contribution		$102,400
Fixed Costs
MOH	$20,000
Selling exp	$24,000	$44,000
Net Operating Income		$58,400

Income Statement under Absorption Costing Method:

Particulars		Amount
Sales Revenue (800 units *$200 per unit)		$160,000
Marginal cost of sales
Direct Material (800 units *$35 per unit)	$28,000
Direct Labor (800 units *$27 per unit)	$21,600
Factory overhead (800 units *$26* per unit)	$20,800	$70,400
Gross Profit		$89,600
Less: Selling Expenses
Variable (800 units *$4 per unit)	$3,200
Fixed	$24,000	$27,200
Net Operating Income		$62,400

*Manufacturing OH = Variable Expenses + Fixed Expenses

$6 + ($20,000/1,000 units) = $6 + $20 = $26 per unit