The Income Statements under Absorption Costing and Variable Costing are as follows:
Absorption Costing Variable Costing
Sales (19,500 units) $2,145,000 $2,145,000
Cost of goods sold $1,491,750 $1,365,000
Gross profit $653,250 $780,000
Selling and administrative expenses:
Fixed factory overhead $162,500
Variable selling and
administrative expenses $296,400 296,400
Fixed selling and
administrative expenses 114,800 411,200 114,800 573,700
Net Income $242,050 $206,300
<h3>What is the difference between Absorption Costing and Variable Costing?</h3>
The difference between Absorption Costing and Variable Costing is that the Ending Inventory costs under Variable Costing include only direct materials, direct labor, and variable factory overhead. Absorption Costing includes all the variable factory costs plus fixed factory overhead (a period cost) in the Ending Inventory costs.
<h3>Data and Calculations under Absorption Costing:</h3>
Sales (19,500 units) $2,145,000
Production costs (25,000 units):
Direct materials $1,017,500
Direct labor 487,500
Variable factory overhead 245,000
Fixed factory overhead 162,500
Total production costs 1,912,500
Cost per unit = $76.50 ($1,912,500/25,000)
Less Ending inventory 420,750 (5,500 x $76.50)
Cost of goods sold $1,491,750
Gross profit
Selling and administrative expenses:
Variable selling and administrative expenses $296,400
Fixed selling and administrative expenses 114,800 411,200
<h3>Data and Calculations under Variable Costing:</h3>
Sales (19,500 units) $2,145,000
Production costs (25,000 units):
Direct materials $1,017,500
Direct labor 487,500
Variable factory overhead 245,000
Total variable production costs 1,750,000
Cost per unit = $70 ($1,750,000/25,000)
Less Ending inventory 385,000 (5,500 x $70)
Cost of goods sold $1,365,000
Gross profit
Selling and administrative expenses:
Variable selling and
administrative expenses $296,400
Fixed factory overhead 162,500
Fixed selling and administrative expenses 114,800 411,200
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