Question

Sparrow Inc. uses absorption costing in a FIFO inventory system. Sparrow had opening inventory of 170 units at a cost of $35 per unit. Ending inventory is 120 units. During 2017 Sparrow sold 1,600 units at $55 each. The following costs apply to Sparrow's operations for the year ended December 31, 2017.

Direct material used in production	$ 12 per unit
Direct labour incurred	5 per unit
Fixed manufacturing overhead	$ 17,050
Variable manufacturing overhead	$ 4 per unit
Selling costs (40% variable)	$ 20,000
Admin costs (10% variable)	$ 30,000

Round to the nearest whole number. Do not use decimals or commas in your answer.

(a) What amounts will be reported on Sparrow's Income Statement for:

             Cost of goods sold $?

             Gross profit $?

             Period costs $?

(b) Sparrow also prepares a variable costing income statement for internal purposes. Assume the fixed manufacturing overhead attached to each unit in beginning inventory was $14 per unit. Will their variable costing net income be higher or lower than under absorption costing and by how much? and low or higher

*you'll have to calculate FMOH released from beginning inventory AND FMOH stored in ending inventory?

  

Answer 1

(a)	Answer
	Cost of Goods Sold = 52801
	Gross Profit = 35199 (88000-52801)
	Period Cost = 50000 (20000+30000)
	Income Statement (Absorption Costing)
	Particulars						Amount	Amount
	Sales   (1600 units * $ 55)							88000
	Production Cost:
	Direct Material consumed (1600*$12)							19200
	Direct Labour cost (1600*$5)							8000
	Variable Manufacturing Overhead (1600*$4)							6400
	Fixed manufacturing Overhead							17050
	Cost of Production							50650
	Add: opening Stock (170*$35)							5950
	Less: Closing Stock [ 120*(50650/1600)]							3799
	Cost of Goods Sold							52801
	Add: Selling and Distribution Cost						20000
	Administration Cost						30000	50000
	Total Cost							102801
	Profit (Sales-Total Cost)							-14801
	Income Statement ( Marginal Costing)
(b)	Particulars						Amount	Amount
	Sales							88000
	Variable manufacturing cost:
	Direct Material consumed (1600*$12)							19200
	Direct Labour cost (1600*$5)							8000
	Variable Manufacturing Overhead (1600*$4)							6400
	Cost of Goods produced							33600
	Add: Opening Stock {170*(35-14)}							3570
	Less: Closing Stock {120*(33600/1600)}							2520
	Cost of Goods Sold							34650
	Add: Variable administration,selling and distribution overhead							11000
	{(30000*10%) + (20000*40%)}
	Total Variable Cost							45650
	Contribution (Sales-Total Variable Cost)							42350
	Less: Fixed Cost (Production, administration, selling etc)							58430
	Net Profit							-16080
	Profit as per Marginal costing is lower by 1279 due to difference in valuation of closing stock (ie, in marginal costing fixed cost will be treated as period cost while production cost in absorbtion costing