Question

You are given the following information:

Units in beginning inventory	0
Units produced	40,000
Units sold	37,000
Selling price per unit	$120.00
Variable costs per unit:
Direct materials	$15.00
Direct labor	$30.00
Variable manufacturing overhead	$5.00
Variable selling and administrative	$3.00
Fixed expenses per year:
Fixed manufacturing overhead	$600,000
Fixed selling and administrative	$800,000

Based on this information, calculate the company's operating income under both absorption costing and variable costing approaches. If there is a difference between the two income numbers, show the reconciliation between the two.

Answer 1

Operating Income under variable costing
Particulars		No of Units	Per Unit			Total
Sales		37000	120			4440000
Variable cost of goods sold
Production cost		40000	50	2000000
Less: Ending Inventory		3000	50	150000		-1850000
Gross Profit						2590000
Less: variable selling and Admin Expenses		37000	3			-111000
Contribution Margin						2479000
Fixed Expenses
Manufacturing Overhead				-600000
Selling and Admin Overhead				-800000		-1400000
Net Operating Income						$1,079,000.00
Calculation of Variable cost per unit-variable costing				Ending Inventory
		Variable Costing	Absorption
Direct Material		15	15	Production		40000
Direct Labor		30	30	Less: Sales		-37000
Variable manufacturing overhead		5	5
Fixed manufacturing overhead			15	Ending Inventory		3000
Total		50	65
Operating Income under Absorption costing
Particulars		No of Units	Per Unit			Total
Sales		37000	120			4440000
Variable cost of goods sold
Production cost		40000	65	2600000
Less: Ending Inventory		3000	65	195000		-2405000
Gross Profit						2035000
Marketing and Adminstrative Expenses
Variable		37000	3	-111000
Fixed				-800000		-911000
Net Operating Income						$1,124,000.00
Fixed Manufacturing overhead per unit
Fixed Cost/ units produced			600000/40000
			$15