Question

Absorption and Variable Costing Comparisons: Production Equals Sales Assume that Smuckers manufactures and sells 30,000 cases of peanut butter each quarter.
The following data are available for the third quarter of 2017.
Total fixed manufacturing overhead.......................................................90,000
Fixed selling and administrative expenses........... .. . .. . .. . . . . .. . . . . . 20,000
Sale price per case..................................................................................32
Direct materials per case .......................................................................15
Direct labor per case ........................................................................6
Variable manufacturing overhead per case ..........................................3
a. Compute the cost per case under both absorption costing and variable costing.
b. Reconcile any differences in income. Explain.
c. Compute te net income under both absorption costing and variable costing.

Answer 1

Answer:

a. Cost per case under Absorption costing:

= Direct materials per case + Direct labor per case + Variable manufacturing overhead per case + Fixed manufacturing overhead per case

= 15 + 6 + 3 + 90,000/ 30,000 cases

= $27

Cost per case under Variable costing:

= Direct materials per case + Direct labor per case + Variable manufacturing overhead per case

= 15 + 6 + 3

= $24

b. First we need to calculate income under both methods:

Under Absorption costing:

= Sales - Cost of goods sold - Selling and Admin expenses

= (30,000 cases * 32) - (30,000 * 27) - 20,000

= $130,000

Under Variable Costing:

= Sales - Cost of Goods sold - Fixed manufacturing overhead - Selling and Admin expenses

= (30,000 * 32) - (30,000 * 24) - 90,000 - 20,000

= $130,000

There is no difference in income because the cases manufactured equals the cases sold.