Question

Ramon Co reported the following units of production and sales for June and July 2014:

                             Produced      Sold

June 2014                100000        90000

July 2014                 100000       105000

Net income under absorption costing for June was $40000, net income under variable costing for July was $50000. fixed manufacturing costs were $600000 for each month. Ramon Co uses actual costing.

How much was net income for July using absorption costing

A. $50000

B $20000

C $80000

D   $40000

What is the answer to this problem and please explain in detail how you came up with the answer.   I do not understand how to come up with the answer without going through a whole absorption costing income statement. Thank you

Answer 1

Answer:

Correct answer is:

B. $20,000

Explanation:

In variable costing fixed costs are treated as period costs and hence therefore not included in product cost. Finished goods inventory under variable costing method are valued at variables costs only.

Whereas in absorption costing manufacturing fixed costs are treated as product costs. Finished goods inventory will have manufacturing fixed costs also factored in.

Given Fixed cost = $600,000

Units produced = 100,000

Fixed cost per unit = $600,000 / 100,000 = $6

In July units produced are 100,000 and units sold are higher at 105,000. The units sold are higher by 5000 units. The net income under variable costing systems is always higher than absorption costing system when inventory decreases.

These 5000 units (drawn from opening stock of July) cost of which will include fixed cost portion of (5,000 * $6 =) $30,000.

As such, when net income under variable cost from July = $50,000,

Net income under absorption costing will be lower by $30,000 = ($50,000 - $30,000) = $20,000