Question

The following data relate to KATZEN Sales Inc., a new company:

Planned and actual production	200,000 units
Sales at $45 per unit	180,000 units
Manufacturing costs:
Variable	$18 per unit
Fixed	$800,000
Selling and administrative costs:
Variable	$6 per unit
Fixed	$925,000

Required: A. Determine the number of units in the ending finished-goods inventory B. Calculate the cost of the ending finished-goods inventory using variable costing C. Calculate the cost of the ending finished-goods inventory using absorption costing D The difference between net income using variable costing & absorption costing is _______ E. Determine the company's variable-costing net income. G. Determine the company's absorption-costing net income. H. Explain the difference in net income amounts. Support your explanation with a reconciliation.

Answer 1

Answer A

The number of units in the ending finished-goods inventory = Units produced - Units sold = 200000 - 180000 = 20000 units

Answer B

Cost of the ending finished-goods inventory using variable costing = Ending inventory units * Variable cost per unit

Cost of the ending finished-goods inventory using variable costing = 20000 units * $18 = $3,60,000

Answer C

Cost of the ending finished-goods inventory using absorption costing = Ending inventory units * [Variable cost per unit + Fixed cost per unit]

Fixed cost per unit = Fixed manufacturing cost / Production Units = $800000 / 200000 units = $4 per unit

Cost of the ending finished-goods inventory using absorption costing = 20000 units * [$18 + $4] = $4,40,000

Answer D

The difference between net income using variable costing & absorption costing = Cost of ending inventory using Absorption costing - Cost of ending variable using Absorption costing

The difference between net income using variable costing & absorption costing = $440000 - $360000 = $80,000

Answer E

Determine the company's variable-costing net income

Sales

$8,100,000

Less : Variable cost

- Manufacturing cost

$3,240,000

- Selling and administrative cost

$1,080,000

$4,320,000

Contribution Margin

$3,780,000

Less : Fixed Expenses

- Manufacturing cost

$800,000

- Selling and administrative cost

$925,000

$1,725,000

Net Income

$2,055,000

Answer G

Determine the company's absorption-costing net income

Sales

$8,100,000

Less : Cost of manufacturing

$3,960,000

Gross Margin

$4,140,000

Less : Selling and administrative exp.

- Variable

$1,080,000

- Fixed

$925,000

$2,005,000

Net Income

$2,135,000

Answer H

Reconciliation of net income amounts

Net Income as per Absorption costing

$2,135,000

Less : Fixed manufacturing cost included in Ending Inventory [20000 units * $4]

$80,000

Net Income as per Variable costing

$2,055,000