Question

selling price	$95
units in beginning inventory	100
units produced	6,200
units sold	5,900
units in ending inventory	400
variable cost per unit
direct materials	$42
direct labor	$28
variable manufacturing overhead	$1
variable selling and administrative	$5
fixed costs
fixed manufacturing overhead	$62,000
fixed selling and administrative	$35,400

Lee Corporation, which has only one product, has provided the following data concerning its most recent month of operations.

The company produces the same number of units every month, although the sales in units vary from month to month. The companys variable costs per unit and total fixed costs have been constant from month to month. Assume direct labor is a variable cost.

Required:

1. what is thr unit product cost for the month under variable costing?

2. what is the unit product cost for the month under absorption costing?

3. calculate the difference in variable costing and absorption costing net operating incomes for the month.

Answer 1

Computation of unit product cost:

	ABSORPTION COSTING	VARIABLE COSTING
Direct Material	$42	$42
Direct Labor	$28	$28
Variable amnufacturing overhead	$1	$1
Fixed manufacturing overhead	$10*	-
Unit product cost	$81	$71

*$62,000/6200units=10$

The cost to manufacture is $81 under absorption costing system and $71 under variable costing system.

Notice that the fixed manufacturing overhead cost has not been included while computing the cost under variable costing system.

the difference in variable costing and absorption costing net operating incomes for the month-

INCOME STATEMENT(ABSORPTION COSTING)

	AMOUNT	AMOUNT
Sale (5,900U*95$)		$5,60,500
Cost of goods sold-
Beg. Inventory(100U*81$)	$8,100
Production Cost(6,200U*81$)	$5,02,200
cost of goods available for sale	$5,10,300
End Inventory(400U*$81)	($32,400)	($4,77,900)
GROSS PROFIT-		$82,600
Admistrative expenses-
Variable(5900U*$5)	$29,500
Fixed	$35,400	($64,900)
NET OPERATING INCOME		$17,700

INCOME STATEMENT(VARIABLE COSTING)

	AMOUNT	AMOUNT
Sale (5,900U*95$)		$5,60,500
Cost of goods sold-
Beg. Inventory(100U*71$)	$7,100
Production Cost(6,200U*71$)	$4,40,200
cost of goods available for sale	$4,47,300
End Inventory(400U*$71)	($28,400)	($4,18,900)
GROSS CONTRIBUTION MARGIN		$1,41,600
Variable Admistrative expenses-		($29,500)
CONTRIBUTION MARGIN		$1,12,100
(-) FIXED COST
Manufacturing overhead	$62,000
Admistrative overhead	$35,400	($97,400)
NET OPERATING INCOME		$14,700

RECONCILIATION OF NET OPERATING INCOME

	AMOUNT
Net operating income under variable costing	$14,700
+ Fixed manufacturing overhead cost defued in inventory (300U*$10)	$3,000
Net operating income under absorption costing	$17,700

Explanation of the difference in net operating income:

Notice that the net operating income under absorption costing is $3,000 ($17,700 – $14,700) higher than the net operating income under variable costing. This difference is because of fixed manufacturing overhead that becomes the part of ending inventory under absorption costing system. The ending inventory absorbs a portion of fixed manufacturing overhead and reduces the burden of the current period. In this way a portion of fixed cost that relates to the current period is transferred to the next period.

Under variable costing, the fixed manufacturing overhead cost is not included in the product cost but charged to the income statement of the relevant period in its entirety. Therefore no portion of fixed cost is absorbed by the ending inventory.