Question

Income Statements, Variable and Absorption Costing

The following information pertains to Vladamir, Inc., for last year:

Beginning inventory, units		1,500
Units produced		100,000
Units sold		101,000
Variable costs per unit:
Direct materials		$8.00
Direct labor		$10.00
Variable overhead		$1.00
Variable selling expenses		$2.00
Fixed costs per year:
Fixed overhead		$300,000
Fixed selling and administrative expenses		$230,000

There are no work-in-process inventories. Normal activity is 100,000 units. Expected and actual overhead costs are the same. Costs have not changed from one year to the next.

Required:

1. How many units are in ending inventory?

2. Without preparing an income statement, indicate what the difference will be between variable-costing income and absorption-costing income.

Assume the selling price per unit is $32. Prepare an income statement using variable costing.

Vladamir, Inc.
Variable-Costing Income Statement
For Last Year
Sales
Less:
Variable cost of goods sold
Variable selling expenses
Contribution margin
Less:
Fixed overhead
Fixed selling and administrative expenses
Operating income

3b. Assume the selling price per unit is $32. Prepare an income statement using absorption costing.

Vladamir, Inc.
Absorption-Costing Income Statement
For Last Year
Sales
Less: Cost of goods sold
Gross profit
Less: Selling and administrative expenses
Operating income

Answer 1

1.Beginning units+ Produced-sold = Ending units

1,500+100,000-101,000

=500 units

2. Absorption costing condsiders Fixed OH as product cost. It is deferred to next period through ending inventory

Variable costing considers Fixed OH as period cost.

difference between both the costing system is

fixed OH in ending inventory - fixed OH in beginning inventory

fixed OH per unit = $300,000/100,000=$3

=$3*500- $3*1,500

=1500-4500

=-$3000

absorption costing net income will be lesser by $3,000 than variable costing.

Vladamir, Inc.
Variable-Costing Income Statement
For Last Year
Sales	$3,232,000[$32*101,000]
Less:
Variable cost of goods sold	$1,919,000[$8+10+1]*101,000
Variable selling expenses	$202,000[$2*101,000]
Contribution margin	$1,111,000[$3,232,000-1,919,000-202,000]
Less:
Fixed overhead	$300,000
Fixed selling and administrative expenses	$230,000
Operating income	$581,000[$1,111,000-$300,000-$230,000]

Vladamir, Inc.
Absorption-Costing Income Statement
For Last Year
Sales	$3,232,000[$32*101,000]
Less: Cost of goods sold	$2,222,000[$8+10+1+3]*101000	material +labor+variable OH+fixed OH
Gross profit	$1,010,000[$3,232,000-2,222,000]
Less: Selling and administrative expenses	$432,000[$2*101,000+$230,000]
Operating income	$578,000[$1,010,000-$432,000]

as we can see that absorption costing net income is lower than variable costing by $3,000 [$581,000-578,000]

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