Answer:
Part a
Unit Product Cost :
Variable Costing = $387
Absorption Costing = $403
Part b
<u>Absorption Costing Income Statement</u>
Sales ($466 x 24,000) $11,184,000
Less Cost of Sales
Beginning Inventory $0
Add Cost of Goods Manufactured $11,284,000
Less Ending Inventory ($1,612,000) ($9,672,000)
Gross Profit $1,512,000
Less Expenses
Selling and Administrative expenses :
Variable ($21 x 24,000) $504,000
Fixed $336,000 ($840,000)
Net Income (Loss) $672,000
Part c
<u>Variable Costing Income Statement</u>
Sales ($466 x 24,000) $11,184,000
Less Cost of Sales
Beginning Inventory $0
Add Cost of Goods Manufactured $10,836,000
Less Ending Inventory ($1,548,000) ($9,288,000)
Contribution $1,896,000
Less Expenses
Fixed Manufacturing overheads $448,000
Selling and Administrative expenses :
Variable ($21 x 24,000) $504,000
Fixed $336,000 ($1,288,000)
Net Income (Loss) $608,000
Part d
<u>Reconciliation of Absorption Costing Profit to Variable Costing Profit</u>
Absorption Costing Profit $672,000
Add Fixed Costs in Opening Inventory $0
Less Fixed Costs in Ending Inventory ($4,000 x $16) ($64,000)
Variable Costing Profit $608,000
Explanation:
Variable Costing calculations
Unit Product Cost = Variable Manufacturing Cost
= $296 + $57 + $34
= $387
Cost of Goods Manufactured (28,000 x $387) = $10,836,000
Ending Inventory (4,000 x $387) = $1,548,000
Absorption Costing calculations
Unit Product Cost = Variable Manufacturing Cost + Fixed Manufacturing Costs
= $296 + $57 + $34 + ($448,000 ÷ $28,000)
= $296 + $57 + $34 + $16
= $403
Cost of Goods Manufactured (28,000 x $403) = $11,284,000
Ending Inventory (4,000 x $403) = $1,612,000
Ending Inventory units
Ending Inventory units = Opening units + Production - Sales
= 0 + 28,000 - 24,000
= 4,000 units
The difference in absorption costing and variable costing net operating income is due to fixed manufacturing costs deferred in ending inventory
