Question

Grainger Company produces only one product and sells that product for $110 per unit. Cost information for the product is as follows:

Direct Material	$16	per Unit
Direct Labor	$26	per Unit
Variable Overhead	$5	per Unit
Fixed Overhead	$33,500

Selling expenses are $4 per unit and are all variable. Administrative expenses of $20,000 are all fixed. Grainger produced 5,000 units; sold 4,000; and had no beginning inventory.

A. Compute net income under

i. Absorption Costing $

ii. Variable Costing    $

B. Which costing method provide higher net income? By how much?

The absorption costing  method provided more net income by $

Answer 1

A
i	Absorption Costing	189200
ii	Variable Costing	182500
B
The absorption costing method provided more net income by $6700

Workings:
	Absorption Costing	Variable Costing
Direct Material	16	16
Direct Labor	26	26
Variable Overhead	5	5
Fixed Overhead	6.7	0	=33500/5000
Unit product cost	53.7	47
Absorption Costing:
Sales revenue	440000	=4000*110
Less: Cost of goods sold	214800	=4000*53.7
Gross margin	225200
Less: Selling and Administrative expenses	36000	=(4000*4)+20000
Net income	189200
Variable Costing:
Sales revenue		440000	=4000*110
Less: Variable expenses
Cost of goods sold	188000		=4000*47
Selling expenses	16000		=4000*4
Total Variable expenses		204000
Contribution margin		236000
Less: Fixed expenses
Fixed Overhead	33500
Administrative expenses	20000
Total Fixed expenses		53500
Net income		182500