Question

E8.24
Calculate the manufacturing cost under absorption and variable costing and explain the difference.
(LO 1, 2) Hardwood Inc. produces mostly wooden crates used for shipping products by ocean freighter. In 2020, Hardwood incurred the following costs:
Wood used
$54,000
Nails (considered insignificant and a variable expense)
350
Direct labour
43,000
Utilities for the plant: $1,500 each month, plus $0.50 for each kilowatt hour used each month
Rent expense for plant for year
21,400
Assume Hardwood used an average of 500 kilowatt hours of utilities per month over the past year.
19
Instructions
a.
Calculate Hardwood's total manufacturing cost if it uses a variable-costing approach.
b.
Calculate Hardwood's total manufacturing cost if it uses an absorption-costing approach.
c.
Determine the reason for the difference between manufacturing costs under these two costing approaches.

Answer 1

Variable costing can exclude some direct fixed costs. ... Variable costing includes all of the variable direct costs in COGS but excludes direct, fixed overhead costs, Hence below is the cost under variable cost approach

Answer to (a) and (b)

	Variable approach	Absorption approach
	Amt in $	Amt in $
Particulars	For 1 month	For 1 month
Wood	54000	54000
Direct Labour		43000	Not to be considered under variable approach
Utilities		1500	Since this is fixed in nature to be used only in absorption
Variable Utilities	250	250
(0.5$ for each hour for 500 KW hour)		1783.333333	Since this is fixed in nature to be used only in absorption
Rent (21400 per year)
Total Manufacturing cost	54250	100533.3333

Absorption costing includes all of the direct costs associated with manufacturing a product, while variable costing can exclude some direct fixed costs. ... Variable costing includes all of the variable direct costs in COGS but excludes direct, fixed overhead costs.