Question

Langdon Company produced 9,600 units during the past year, but only 8,400 of the units were sold. The following additional information is also available.

Direct materials used		$76,100
Direct labor incurred		$32,000
Variable manufacturing overhead		$21,500
Fixed manufacturing overhead		$38,400
Fixed selling and administrative expenses		$70,000
Variable selling and administrative expenses		$10,000

There was no work in process inventory at the beginning and end of the year, nor did Langdon have any beginning finished goods inventory.

What would be Langdon Company’s finished goods inventory cost on December 31 under variable costing? (Round intermediate calculations to 2 decimal places e.g. 10.25 and final answer to 0 decimal places, e.g. 2,510.)

Which costing method, absorption or variable costing, would show a higher net income for the year? By what amount? (Round intermediate calculations to 2 decimal places e.g. 10.25 and final answer to 0 decimal places, e.g. 2,510.)

Answer 1

Solution:

The inventory costs vary in absorption costing and variable costing. The reason is the presence of fixed costs. Under absorption costing both variable manufacturing costs and prorata fixed costs are included in product costs. Whereas variable costs includes only the variable manufacturing costs and treats all fixed cost as period costs.

1.

Langdon Company’s finished goods inventory cost on December 31 under variable costing = (9600-8400) * $13.50 = 1200*13.5 = $16200

Workings:

2.

Langdon Company’s finished goods inventory cost on December 31 under absorption costing = 1200* 17.50 = $21000

Workings:

Absorption costing will have show a higher net income to the tune of (151800 - 147000) = $4800. The cost of production in absorptionl costing is less than that of marginal costing. This difference is due to the fixed cost attached to the ending inventory = 1200*4 = $4800.

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