Question

Grainger Company produces only one product and sells that product for $110 per unit. Cost information for the product is as follows:

Direct Material	$16	per Unit
Direct Labor	$24	per Unit
Variable Overhead	$6	per Unit
Fixed Overhead	$26,800

Selling expenses are $3 per unit and are all variable. Administrative expenses of $12,000 are all fixed. Grainger produced 4,000 units; sold 3,200; and had no beginning inventory.

A. Compute net income under

i. Absorption Costing $

ii. Variable Costing    $

B. Which costing method provide higher net income? By how much?

The absorption costing  method provided more net income by $ .

Answer 1

Answer A	Income under
i	Absorption Costing	$        161,760
ii	Variable Costing	$        156,400

Answer B

Absorption costing is giving much income by $5360

Detailed workings

Absorption Costing

Absorption Costing
Income Statement
Sale = 3200*100	320000
Less: Cost of Goods Manufactured = 3200*52.70	168640
Less: Selling and Administrative Expenses
Variable Selling expense = 3200*3	9600
Fixed	12000
Net Income	161760
Calculation of cost of goods manufactured
Direct Material	$64,000
Direct Labor	$96,000
Variable Overhead	$24,000
Fixed Overhead	$26,800
Total cost of goods manufactured	$210,800
Units Produced	4000
Cost per unit	$52.70

Variable Costing Income

Variable Costing
Income Statement
Sales =3200	$     352000
Less: Variable expenses = 20000 x 49	$     156,800
Contribution	$     163,200
Less: Fixed expense = 26800+12000	$        38,800
	156400
Direct Material	$16	per Unit
Direct Labor	$24	per Unit
Variable Overhead	$6	per Unit
Selling expenses	$3
Variable cost per unit	$49

Answer B

Income more by Absorption costing method = $161760-154400 = $5360

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