Question

Computational Problems: Variable Costing & Absorption Costing
1. The following data relate to QQQ Company, a new corporation, during a period when the firm produced and

sold 100,000 units and 90,000 units, respectively:

Direct materials used	$400,000
Direct labor	200,000
Fixed manufacturing overhead	250,000
Variable manufacturing overhead	120,000
Fixed selling and administrative expenses	300,000
Variable selling and administrative expenses	45,000

The company met its original planned production target of 100,000 units. The selling price per unit was $15.

Required:

1. What is the cost of QQQ’s end-of-period finished-goods inventory under the variable-costing method?

2. Which costing method, absorption or variable costing, would show a higher operating income for the year? By

   what amount?

3. Calculate the company's variable-costing net income.

4. Calculate the company's absorption-costing net income.

5. Reconcile (i.e., explain) the difference between net income under the two costing methods.

Answer 1

	unit product cost under variable & absorption costing
					variable		Absorption
	Direct materials used				4		4
	Direct labor				2		2
	Variable manufacturing overhead				1.2		1.2
	FMOH	(250,000/100000)=					2.5
	unit product cost under Variable costing				7.2		9.7
1)	finished goods inventory under variable costing
	10,000*7.2
	72000
2)	Absorption costing will show higher net income by
	10,000*(250,000/100000)
	25000
3)	variable costing net income
	sales	(90,000*15)=				1350000
	less:Variable expenses
	cost of goods sold		(90000*7.2)		648000
	selling & Adm expense		(90000*5)		45,000	693,000
	Contribution margin					657,000
	Fixed expenses
	fixed manufacturing overhead				250,000
	fixed selling & adm expense				300,000	550,000
	net income					107,000
4)	Absorption costing net income
	sales					1350000
	less:cost of goods sold			(90000*9.7)		873000
	gross margin					477000
	selling expense
	variable selling & adm expense				45,000
	fixed selling & adm expense				300,000	345,000
	net income					132,000
5)	Reconcilation
	net income under variable costing					107,000
	Add:ending inventory deferred					25,000
	net inccome under absorption costing					132,000