In: Accounting
Xiangling Company’s income under absorption costing was P42,600 higher than its income under variable costing. The company sold 15,000 units during the year, and its variable costs were P18 per unit, P4 of which represents the variable selling expense. The ending inventory is 11,600 units. Fixed selling and administrative expense is P35,000. If production cost was P20 per unit under absorption costing, then
1. How much is the fixed factory overhead per unit?
2. What is the beginning inventory units?
3. How much is the profit under variable costing if the selling price is P30?
DETAILS GIVEN IN QUESTION:
ABSORPTION COSTING INCOME IS HIGHER THAN VARIABLE COSTING BY P42,600
UNITS SOLD =15,000 CLOSING STOCK UNITS = 11,600. TOTAL VARIABLE COST p.u.. P18. OF WHICH VARIABLE SELLING COST p.u. P4.
FIXED ADMIN COST P35,000. PRODUCTION COST UNDER ABSORPTION COSTING = P 20 p.u.
ANSWER:
1. FIXED FACTORY OVERHEAD p.u.
TOTAL VARIABLE COST = P18
(-) VARIABLE SELLING COST = P4
HENCE, VARIABLE PRODUCTION COST = P14
TOTAL PRODUCTION COST |
P20 |
(-) VARIABLE PRODUCTION COST |
P14 |
HENCE, FIXED PRODUCTION COST |
P6 |
2. BEGINNING INVENTORY UNITS
DIFFERENCE IN INCOME AS PER ABSORPTION COST & VARIABLE COST IS DUE TO VALUATION OF OPENING & ENDING INVENTORIES. UNDER ABSORPTION COST, INVENTORIES ARE VALUED AT TOTAL PRODUCTION COST. WHEREAS, UNDER VARIABLE COST, INVENTORIES ARE VALUED AT VARIABLE PRODUCTION COST.
DIFFERENCE IN INCOME |
(higher in Absorption) |
P42,600 |
(-) DIFFERENCE DUE TO CLOSING INVENTORY |
(20-14) * 11600 |
P69,600 |
HENCE, DIFFERENCE DUE TO BEGINNING INVENTORY |
balance figure |
P-27,000 |
HENCE, UNITS OF BEGINNING INVENTORY = 27,000 / (20-14) = 27,000 / 6 = 4,500 UNITS
3. PROFIT UNDER VARIABLE COSTING METHOD:
SALES (A) |
(15,000 X 30) |
450,000 |
|
(-) |
VARIABLE COST |
||
VARIABLE PRODUCTION COST # |
(22,100 X 14) |
309,400 |
|
(+) OPENING INVENTORY |
(4,500 X 14) |
63,000 |
|
(-) CLOSING INVENTORY |
(11,600 X 14) |
(162,400) |
|
VARIABLE SELLING & ADMIN COST |
(15,000 X 4) |
60,000 |
|
NET VARIABLE COST (B) |
270,000 |
||
CONTRIBUTION (A-B) |
180,000 |
||
(-) |
FIXED COST |
||
PRODUCTION COST # |
(22,100 X 6) |
132,600 |
|
SELLING & ADMIN |
35,000 |
||
TOTAL FIXED COST |
167,600 |
||
PROFIT (CONTRIBUTION – FIXED COST) |
P 12,400 |
# UNITS PRODUCED |
|
SALES |
15,000 |
(+) ENDING INVENTORY |
11,600 |
(-) BEGINNING INVENTORY |
(4,500) |
PRODUCTION |
22,100 |