Question

Tom Kumar makes refrigerators. Each refrigerator is selling at a price of $1,350and the cost of direct materials per unit is$300.Direct labor costs per unit equal$275.Fixed manufacturing overhead is $475per unit.     Tom Kumar also incurs $55.50 in variable selling costs per unit and $80,000 in total fixed selling costs.     For the current year, Tom Kumar made 800units. Also Tom sold 730units in the current year    Fill in the blanks by typing in ONLY numbers (rounded to the nearest digit). Do not type anything else such as $ sign or any text. You need to answer the following three questions by filling in the values in the respective answer boxes.   A) What is the inventoriable cost per unit for each unit in the ending inventory of refrigerators under variable costing method? B) What is the inventorialbe cost per unit for each unit in the ending inventory of refrigerators under absorption costing method?C) Suppose Tom Kumar began the year with zero inventories of refrigerators. What is the difference between the incomes that would be reported under absorption costing and under variable costing?                      Inventoriable cost under variable costing system per unit$                     Inventoriable cost under absorption costing system per unit$                     Difference in income between the two inventory costing systems$

Answer 1

Solution:

Part A - the inventoriable cost per unit for each unit in the ending inventory of refrigerators under variable costing method

Variable Costing System

1) Product Cost refers to the costs used to fabricate/make/produce a product.

2) Under Variable Costing System, product cost includes only following variable manufacturing costs:

- Cost of direct material used

- Direct labor cost

- Variable manufacturing overheads.

3) Under this system, fixed costs are not considered in product cost and for valuation of closing stock of finished goods. Fixed costs are treated as period cost in this system.

4) The value of finished goods and work in process is also comprised only of Manufacturing Variable Costs.

5) Selling and administrative expenses are not included because these are not the expenses incurred in production department. These expenses relate to selling and admin department.

Unit Product Cost (Variable Costing)	Unit Cost
Direct Materials	$300
Direct Labor	$275
Fixed Manufacturing Overhead	$0
Unit Product Cost	$575

Inventoriable Cost per unit = $575

Part B – the inventorialbe cost per unit for each unit in the ending inventory of refrigerators under absorption costing method

Absorption Costing System

- Product Cost refers to the costs used to fabricate/make/produce a product.

- Under Absorption Costing, product cost includes both fixed and variable manufacturing expenses incurred in fabrication of the product or service.

- It includes cost of direct material used, cost of direct labor, consumable supplies used and manufacturing/factory overheads (both variable as well as fixed factory overhead).

- Ending Inventory is valued on Production Cost.

- Product Cost does not include Selling, General and Administrative Expenses.

Hence, only Variable Production Cost and Fixed Production Costs are considered as Product Cost and the ending inventory is valued at product cost.

Unit Product Cost (Absorption Costing)	Unit Cost
Direct Materials	$300
Direct Labor	$275
Fixed Manufacturing Overhead	$475
Unit Product Cost	$1,050

Inventoriable Cost per unit = $1,050

Part C - difference between the incomes that would be reported under absorption costing and under variable costing

Difference will be the fixed manufacturing cost taken in ending inventory under absorption costing but in variable costing fixed manufacturing cost is not included in ending inventory cost.

Differencet in Income = Ending Inventory (800 – 730 units) * Fixed manufacturing cost per unit $475

= $33,250

Inventoriable cost under variable costing system per unit $575

Inventoriable cost under absorption costing system per unit $1,050

Difference in income between the two inventory costing systems = $33,250