Question

Rabin Ltd uses a perpetual FIFO inventory system and has compiled the following cost information for the year ended December 31, 2017. Opening inventory consisted of 100 units. The cost per unit of opening inventory is $100 DM, $60 DL and $110 MOH (of which 20% is variable). Robin produced 1,400 units and sold 1,250 units during 2017. The selling price per unit is $320.

Direct materials	$135,000
Wages for assembly workers	104,000
Utilities on factory (of which 25,000 is fixed)	68,000
Factory supervisor salary	50,000
Bookkeeper salary	35,000
Office rent	60,000
Amortization of factory and equipment	45,000

Answer the following for the year ended December 31, 2017 (round your answer to the nearest unit or dollar and use the rounded answer for subsequent calculations):
(a) How many units are left in ending inventory at December 31, 2017? units

(b) What is the cost per unit in ending inventory under:

                    absorption costing $/ unit?

                    variable costing $/ unit?

                    throughput costing $/ unit?

(c) Calculate the total cost of opening inventory using:

                    absorption costing $?

                    variable costing $?

                    throughput costing $?

(d) Calculate: gross profit $?

                     contribution margin $?

                     throughput margin $?

(e) Net income will be greatest under which costing method? Absorption costing or Variable costing

(f) Net income will be lowest under which costing method? Absorption costing or Variable costing

Answer 1

a)	Opening Inventory Units	100
	Units Produced	1400
	Units available for sale	1500
	Units Sold	1250
	Ending Inventory Units	250

b)		Absorption Costing
	Direct Material	135,000
	Wages	104,000
	Utilities on Factory	68,000
	Factory Supervisor Salary	50,000
	Amortisation of Factory and Equipment	45,000
	Total Cost	402,000
	Units produced	1,400
	Cost per unit	287
	Total Cost on Ending Inventory	71,786
		Variable Costing
	Direct Material	135,000
	Wages	104,000
	Variable Utilities on Factory (68000-25000)	43,000
	Total Cost	282,000
	Units Produced	1,400
	Cost per unit	201
	Total Cost on Ending Inventory	50,357
		Throughput costing
	Direct Material	135,000
	Units Produced	1,400
	Cost per unit	96
	Total Cost on Ending Inventory	24,107

c)	Absorption Costing	Per unit	Total Cost
	Direct Material	100	10000
	Wages	60	6000
	MOH	110	11000
	Total Cost of Opening Inventory		27000
	Variable Costing	Per unit	Total Cost
	Direct Material	100	10000
	Wages	60	6000
	Variable MOH (20% of 110)	22	2200
	Total Cost of Opening Inventory		18200
	Throughput Costing	Per unit	Total Cost
	Direct Material	100	10000
	Total Cost of Opening Inventory		10000

d)	Absorption Costing
	Sales	400,000
	COGS	357,214
	(27000+402000-71786)
	Gross Profit	42,786
	Variable Costing
	Sales	400,000
	Variable Cost	249,843
	(18200+282000-50357)
	Contribution Margin	150,157
	Throughput Margin
	Sales	400,000
	Variable Cost	120,893
	(10000+135000-24107)
	Throughput Margin	279,107

(e)

e)		Absorption Costing
	Sales	400000
	COGS	357214
	Gross Profit	42786
	Bookkeeper Salary	35000
	Office rent	60000
	Net Income	-52214
		Variable Costing
	Sales	400000
	Variable Cost	249843
	Contribution	150157
	Fixed Utilties	25000
	Factory Supervisor Salary	50000
	Bookkeeper Salary	35000
	Office rent	60000
	Amortisation	45000
	Net Income	-64843

Net Income will be greatest under absorption costing. This is because under absorption costing, some cost of fixed manufacturing cost is deferred to next period. It forma part of the cost of inventory.

Net Income will be lowest under variable costing as all fixed cost for the period is booked in the same period.

If you also consider throughput costing also, then net income under throughput costing will be the lowest because only direct materials are considered while valuing inventory. Direct labour and variable cost is debited to profit and loss in the same period as it is incurred instead of deferring the cost to the extent of ending inventory to next period.