Question

Exercise 8-23 Absorption and Variable Costing (LO 8-1, 8-4) Pandora Pillow Company’s planned production for the year just ended was 22,100 units. This production level was achieved, but only 18,700 units were sold. Other data follow: Direct material used $ 663,000 Direct labor incurred 329,290 Fixed manufacturing overhead 472,940 Variable manufacturing overhead 201,110 Fixed selling and administrative expenses 375,700 Variable selling and administrative expenses 127,075 Finished-goods inventory, January 1 None The cost per unit remained the same in the current year as in the previous year. There were no work-in-process inventories at the beginning or end of the year. Required: 1. What would be Pandora Pillow Company’s finished-goods inventory cost on December 31 under the variable-costing method? (Do not round intermediate calculations.) 2-a. Which costing method, absorption or variable costing, would show a higher operating income for the year? 2-b. By what amount? (Do not round intermediate calculations.)

Answer 1

1)Units in ending inventory =Units produced -units sold

                             = 22100 - 18700

                             = 3400 units

	unit cost under variable costing
Direct material	663000
Direct labor	329290
Variable manufacturing overhead	201110
Total product cost	1193400
number of units produced	22100
unit cost	1193400/22100 =$ 54

cost of finished goods inventory under variable costing =ending inventory in units* unit cost

                                   = 3400 *54

                                   = 183600

2a)Under absorption costing ,Fixed manufacturing overhead is a part of product cost that is added to cost of product whereas under Variable costing ,fixed overhead is a period cost and charged to income statement in the period it is incurred .

Thus in case of absorption costing ,If number of units produced is greater than number of unit sold ,some of fixed manufacturing overhead is deferred in ending inventory whereas same is charged to income statement in case of variable costing.

Thus ,in the given problem ,because units produced is greater than units sold ,Income under absorption costing is greater .

2b)Fixed manufacturing overhead per unit =Total fixed overhead /units produced

                     = 472940 /22100

                     = $ 21.4 per unit

Amount of income will be greater by =units in ending inventory * Fixed manufacturing overhead per unit

              = 3400 *21.4

              = 72760