Question

Easton Pump Company’s planned production for the year just ended was 19,300 units. This production level was achieved, and 20,600 units were sold. Other data follow:
Direct material used $ 573,210
Direct labor incurred 277,920
Fixed manufacturing overhead 391,790
Variable manufacturing overhead 185,280
Fixed selling and administrative expenses 351,260
Variable selling and administrative expenses 112,905
Finished-goods inventory, January 1 2,200 units

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 Easton Pump 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

Solution:

1) Finished goods inventory cost $48300

2) a. Higher operating income method variable costing

2) b. Difference in reported income $26,390

1. To know the number of units remaining in closing stock :

Opening inventory + production - sales => 2200 + 19300 - 20600

                                                                => 900 units

Now,

Cost per unit under variable cost = (direct material + direct labour + variable manufacturing overhead)/ number of units manufactured

=>($573,210 + $277,920 + $185,280) / 19,300

=>$53.7 per unit

finished goods inventory cost using variable costing = $53.7*900 units                      

                                                                                      =>$48300

2) a. variable costing

Since the number of units in closing inventory reduced, the variable costing will show a higher income.

2) b. difference in reported income

= (change in closing units ) *( current year overhead absorption)

here,

change in closing units = 2,200 units - 900 units

                                       =>1300 units

current year overhead absorption = fixed manufacturing overhead / units produced.

=> 391,790 / 19,300 units

=>$20.3 per unit

now,

difference in reported income = $20.3 * 1,300 units

                                                  =>$26,390