Question

Absorption Costing and Variable Costing Roessler Scandinavia is a new division of Roessler International. The division manufactures spangles in a single manufacturing facility. Following is pertinent data for 2005, its first year of operations (hence, there is no beginning inventory). Annual factory capacity (in units): 300,000 Units manufactured in 2005: 240,000 Sales demand: 180,000 Variable manufacturing cost per unit: $12 Fixed manufacturing overhead costs: $1,450,000 Variable non-manufacturing costs per unit: $3 (this is a sales commission) Fixed non-manufacturing costs: $110,000 Sales price per unit: $ 30 The sales demand, per-unit sales price, per-unit variable manufacturing cost, per-unit sales commission, and total fixed non-manufacturing costs are all expected to remain unchanged in 2006 from 2005. Fixed manufacturing overhead costs are expected to increase by 10%.

Required:

Calculate 2005 income and projected 2006 income under Absorption Costing, under each of the following sets of assumptions:

c) The company accounts for inventory using LIFO, allocates fixed manufacturing overhead costs based on units produced, manufactures enough units in 2006 to plan for 90,000 units in ending inventory at the end of the year.

d) The company accounts for inventory using LIFO, allocates fixed manufacturing overhead costs based on units produced, manufactures at capacity in 2006

Answer 1

c) When Company plans to manufacture enough units to maintain 90,000 units in ending inventory

Units Manufactured in 2005 = 240,000

Units sold in 2005 = 180,000

Closing Inventory for 2005 and Opening Inventory of 2006 = 60,000

Projected units to be sold in 2006 = 180,000

Required clsoing stock of 2006 = 90,000

Therefore number of units to be manufactured in 2006 = 210,000

Variable Costing

Income Statement

Particulars	Amount
2005	2006
Selling Price	30	30
Less:
Variable Manufacturing Cost	12	12
Variable Non Manufacturing Cost	3	3
Gross Profit per unit	15	15
Number of Units	180,000	180,000
Gross Profit	2,700,000	2,700,000
Less:
Fixed Manufacturing Cost	1,450,000	1,595,000
Fixed Non Manufacturing Cost	110,000	110,000
Net Profit	1,140,000	995,000

Absorption costing

• In 2005
  • Fixed Manufacturing Cost = 1,450,000
  • Number of units manufactured = 240,000
  • Absorption rate = 6.04 per unit
• In 2006
  • Fixed Manufacturing Cost = 1,595,000
  • Number of units manufactured = 210,000
  • Absorption rate = 7.60 per unit

Calculation of Manufacturing cost per unit

Particulars	2005	2006
Variable Manufacturing Cost	12	12
Fixed Manufacturing Cost	6.04	7.6
Total Manufacturing Cost	18.04	19.6

Calculation of Cost of Goods Sold and Clsoing Inventory

Particulars	2005	2006
Opening Inventory	0	1,082,400
Manufactured	4,329,600	4,116,000
Closing stock	1,082,400	1,670,400
COGS	3,247,200	3,528,000

Income Statement

Particulars	2005	2006
Sales	5,400,000	5,400,000
Less
COGS	3,247,200	3,528,000
Gross Profit	2,152,800	1,872,000
Less:
Variable Non Manufacturing Cost	540,000	540,000
Fixed Non Manufacturing Cost	110,000	110,000
Net Profit	1,502,800	1,222,000

d) When Company plans to manufacture at capacity in 2006

Units Manufactured in 2005 = 240,000

Units sold in 2005 = 180,000

Closing Inventory for 2005 and Opening Inventory of 2006 = 60,000

Projected units to be sold in 2006 = 180,000

Units Manufactured in 2006 = 300,000

Therefore number of units in clsoing inventory in 2006 = 180,000

Income Statement

Particulars	Amount
2005	2006
Selling Price	30	30
Less:
Variable Manufacturing Cost	12	12
Variable Non Manufacturing Cost	3	3
Gross Profit per unit	15	15
Number of Units	180,000	180,000
Gross Profit	2,700,000	2,700,000
Less:
Fixed Manufacturing Cost	1,450,000	1,595,000
Fixed Non Manufacturing Cost	110,000	110,000
Net Profit	1,140,000	995,000

Absorption costing

• In 2005
  • Fixed Manufacturing Cost = 1,450,000
  • Number of units manufactured = 240,000
  • Absorption rate = 6.04 per unit
• In 2006
  • Fixed Manufacturing Cost = 1,595,000
  • Number of units manufactured = 300,000
  • Absorption rate = 5.32 per unit

Calculation of Manufacturing cost per unit

Particulars	2005	2006
Variable Manufacturing Cost	12	12
Fixed Manufacturing Cost	6.04	5.32
Total Manufacturing Cost	18.04	17.32

Calculation of Cost of Goods Sold and Clsoing Inventory

Particulars	2005	2006
Opening Inventory	0	1,082,400
Manufactured	4,329,600	5,196,000
Closing stock	1,082,400	3,160,800
COGS	3,247,200	3,117,600

Income Statement

Particulars	2005	2006
Sales	5,400,000	5,400,000
Less
COGS	3,247,200	3,117,600
Gross Profit	2,152,800	2,282,400
Less:
Variable Non Manufacturing Cost	540,000	540,000
Fixed Non Manufacturing Cost	110,000	110,000
Net Profit	1,502,800	1,632,400

Feel free to ask for any clarification, if required. Kindly provide feedback by thumbs up. It would be highly appreciated. Thank You.