Question

Hyper Color Co. Manufactures Widgets...the following data is related to sales and production of the widgets for last year.

Selling price per unit ..... $130

Variable Manufacturing costs per unit .... $61

Fixed Manufacturing Overhead (total) .... $35,000

Fixed Selling and Administrative Expenses (total) ... $8,000

Units Produced ... 1700

Units Sold ... 1400

Prepare an operating income statement for both Absorption and Variable Costing (explain why different)

Answer 1

	Fixed Manufacturing Overhead(1)	35000
	Units Produced(2)	1700
	Per Unit Recovery Rate(1/2)	20.59
	Units Sold	1400
	Overhead to be transferred in Absorption	28824	(20.59*1400)
	Calculation of Product Cost:	Variable	Absorption
	Variable Cost	61.00	61.00
	Manufacturing Fixed Cost PU	0	20.59
	Product Cost PU	61.00	81.59
	Cost of Goods Sold(Product cost*1400)	85400	114224
	Income Statement Under Absorption Costing:
	Sales Revenue		182000
	Less: Variable Costs
	Variable Manufacturing OH	85400
	Fixed Manufacturing OH	28824
	Total Cost of Goods Sold		114224
	Gross Contribution		67776
	Less: Fixed S&A Expense		8000
	Net Operating Income		59776
	Income Statement Under Variable Costing:
	Sales Revenue		182000
	Less: Variable Costs
	Variable Manufacturing OH	85400
	Total Cost of Goods Sold		85400
	Gross Contribution		96600
	Less: Fixed Manufacturing OH Expense		35000
	Less: Fixed S&A Expense		8000
	Net Operating Income		53600
Note:	Under Absorption Costing Fixed Manuafcturing OH are considered as part of Unit Cost whereas in Variable costing it is not considered
	Under Absorption Costing Fixed Manuafcturing OH are charged to Income statement only for Units Sold whereas in Variable costing Total Fixed Manufacturing OH are charged to Income Statement
	This leads to difference in Net Operating income of Both costing methods
	Net Operating Income in Absorption Costing		59776
	Net Operating Income in Variable Costing		53600
	Net Difference		6176
	Unit Produced	1700
	Units Sold	1400
	Closing Units(A)	300
	Per Unit Recovery Rate(B)	20.59
	Impact of Closing Units(A*B)	6176