Question

Q6 A company produced 10,000 units in March 2018 and sold 8,500 of them. The variable manufacturing costs per unit was $16 and the fixed cost per unit was $3

Variable selling and administrative expenses were $5 and the fixed selling and administrative expenses were $45,000.    (5 points each 15 points total)

Using absorption costing what would be the income from operations for March? $_____________________________________________

Using variable costing what would be the income from operations for March?

$_______________________________________________

C. Explain why the income from operations would be different under absorption costing versus variable costing? ___________________________________________________________________________________________________________________________________________________________________________

Answer 1

Note: As the selling price information is missing in question, amount of profit or loss can't be determined.

a)

Absorption Costing
Sales		xxx
Variable Manufacturing Cost (10,000*16)	160000
Fixed Manufacturing Cost (10,000*3)	30000
Cost of Goods Produced	190000
Less: Closing Stock (190000 /10000)*1500	-28500
Cost of Goods Sold	161500
Add: Administrative and sellingexpenses
Variable (8500 * 5)	42500
Fixed	45000
Cost of Sales		249000
Profit		xxx

b)

Marginal Costing
Sales Revenue		xxx
Variable manufacturing cost	160000
Cost of Goods Produced	160000
Less: Closing Stock (160000/10000)*1500	-24000
	136000
Add: Variable Selling and administative expenses
(8500*5)	42500
Total Variable Cost		178500
Contribution (Sales - Variable Costs)
Less: Fixed Costs
Manufacturing	30000
Selling and administartive	45000	75000
Proft		xxx

c)

Income from operation under marginal costing will be different from absorption costing by $4500 (difference between the total cost charged to sales under both techniques 253500 - 249000). This difference arise due to difference in the valuation of closing inventory in the techniques. In the absorption costing, fixed manufacturing cost form the part of 'Cost of Production', hence the fixed cost $4500 on closing balance of 1500 units has been carried forward to next year thus reducing the fixed manufacturing costs to be charged from current year revenue. But in the case of marginal costing fixed manufacturing cost do not form part of 'Cost of Production', therefore inventory is valued at variable costs only and all the fixed costs incurred during the year are charged to the same period's revenue.