Question

Diego Company manufactures one product that is sold for $76 per unit in two geographic regions—the East and West regions. The following information pertains to the company’s first year of operations in which it produced 58,000 units and sold 54,000 units.

  

Variable costs per unit:
Manufacturing:
Direct materials	$	23
Direct labor	$	15
Variable manufacturing overhead	$	3
Variable selling and administrative	$	3
Fixed costs per year:
Fixed manufacturing overhead	$	1,160,000
Fixed selling and administrative expenses	$	640,000

  

The company sold 40,000 units in the East region and 14,000 units in the West region. It determined that $320,000 of its fixed selling and administrative expenses is traceable to the West region, $270,000 is traceable to the East region, and the remaining $50,000 is a common fixed cost. The company will continue to incur the total amount of its fixed manufacturing overhead costs as long as it continues to produce any amount of its only product. 7. What is the amount of the difference between the variable costing and absorption costing net operating incomes (losses)? Difference of Variable Costing and Absorption Costing Net Operating Incomes Variable costing net operating income (loss) Deduct: Fixed manufacturing overhead cost deferred in inventory under absorption costing Absorption costing net operating income (loss)

Answer 1

Answer

	Year 1
Direct Material	23
Direct Labor	15
Variable Manufacturing Overhead	3
Unit Cost	41

Under Variable Costing, we will include only Variable manufacturing expenses while calculating Unit cost

Sales	4,104,000
Variable Expenses
Cost of Goods Sold
Opening Inventory	-
Add: Cost of Goods Manufactured	2,378,000 (58,000 units *$41)
Less: Closing Inventory	164,000 (4,000 units *$41)
Cost of Goods Sold	2,214,000
Variable Selling and Adm. expenses @ $3	162,000
Total Variable Expenses	2,376,000
Contribution Margin	1,728,000
Fixed Expenses
Fixed Manufacturing Overhead	1,160,000
Fixed Selling and Adm. Expenses	640,000
Total Fixed expenses	1,800,000
Net operating income	(72,000)

Under Absorption Costing

Fixed Manufacturing Overhead per unit = Fixed Manufacturing Overhead / No. of Unit Produced

While calculating Unit cost under Absorption costing, we will include Fixed Manufacturing overhead per unit while calculating Unit Cost.

	Year 1
Direct Material	23
Direct Labor	15
Variable Manufacturing Overhead	3
Fixed Manufacturing overhead	20 ($1,160,000 / 58,000 Units)
Unit Cost	61
Sales	4,104,000
Variable Expenses
Cost of Goods Sold
Opening Inventory	-
Add: Cost of Goods Manufactured	3,538,000 (58,000 units *$61)
Less: Closing Inventory	244,000 (4,000 units *$61)
Cost of Goods Sold	3,294,000
Variable Selling and Adm. expenses @ $3	162,000
Total Variable Expenses	3,456,000
Contribution Margin	648,000
Fixed Expenses
Fixed Selling and Adm. Expenses	640,000
Total Fixed expenses	640,000
Net operating income	8,000

Reconciliation between variable and absorption costing

The difference between profits is $64,000; this is because the production is more than sales.

Net Loss under Variable costing	(72,000)
Add: Fixed manufacturing overhead differed in Closing Inventory (4,000 Units * $20)	80,000
Profit under Absorption costing	8,000