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Absorption and Variable Costing Assignment
Question 1 What is the basic difference between absorption costing and variable costing?
Solution 1: The basic difference between absorption and variable costing is the inventory valuation. Under absorption costing, all product costs irrespective of fixed or variable are considered for inventory valuation whereas under variable costing, only variable product costs are considered for inventory valuation.
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Question 2 Refined Elegance Corp. makes a desk specially designed for personal computers. The desk sells for $200.
Solution 2:
| Units in beginning inventory |
0 |
| Units produced |
10,000 |
| Units sold |
9,000 |
| Units in ending inventory |
1,000 |
| Variable costs per unit |
|
| Direct materials |
$40 |
| Direct labour |
35 |
| Variable manufacturing overhead |
10 |
| Variable selling and administrative |
25 |
| Total variable cost per unit |
$110 |
| Fixed costs |
|
| Fixed manufacturing overhead |
$300,000 |
| Fixed selling and administrative |
450,000 |
| Total fixed costs |
$750,000 |
i. Compute the unit product cost for one computer desk.
| Unit product cost for one computer desk |
|
| Formula= (DM+DL+Variable manufacturing Overheads) |
|
| Direct materials |
$40 |
| Direct labour |
35 |
| Variable manufacturing overhead |
10 |
| Unit product cost for one computer desk |
$85 |
ii. Prepare a contribution format income statement for the year.
| Contribution format Income statement |
|
|
|
| Total Sales |
|
1800000 |
|
| Less: Variable cost |
|
|
|
| Beginning Inventory |
0 |
|
|
| Manufacturing cost |
850000 |
|
|
| Cost of Goods Available for Sale |
850000 |
|
|
| Less: Ending inventory |
85000 |
|
|
| Cost of Goods Sold |
|
765000 |
|
| Gross Margin |
|
1035000 |
|
| Less: variable selling & admin expenses |
|
225000 |
|
| Contribution margin |
|
810000 |
|
| Fixed manufacturing expense |
300000 |
|
|
| Fixed selling & admin expenses |
450000 |
|
|
| Total fixed cost |
|
750000 |
|
| Net Income |
|
60000 |
|
iii. What is the company's break-even point in terms of units sold?
| Break-even point in terms of units sold |
|
| Formula= Fixed costs/ per unit contribution |
|
| Total fixed costs |
$750,000 |
| Contribution per unit |
$90 |
| Break-even point in terms of units sold |
8333.333333 |
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Question 3 Refer to the data in the previous question for Refined Elegance Corp. Assume in this exercise that the company uses absorption costing.
Solution:
i. Compute the unit product cost for one computer desk.
| Unit product cost for one computer desk |
|
| Formula= (DM+DL+Variable manufacturing Overheads+ Fixed manufacturingoverhead(absorbed)) |
|
| Direct materials |
$40 |
| Direct labour |
$35 |
| Variable manufacturing overhead |
$10 |
| Fixed Manufacturing overheads (Absorbed) |
$30 |
| Unit product cost for one computer desk |
$115 |
ii. Prepare an income statement for the year.
| Contribution format Income statement |
|
|
| Total Sales |
|
1800000 |
| Less: Variable cost |
|
|
| Beginning Inventory |
0 |
|
| Manufacturing cost |
1150000 |
|
| Cost of Goods Available for Sale |
1150000 |
|
| Less: Ending inventory |
115000 |
|
| Cost of Goods Sold |
|
1035000 |
| Gross Margin |
|
765000 |
| Less: variable selling & admin expenses |
225000 |
|
| Fixed selling & admin expenses |
450000 |
|
| Total selling and administration cost |
|
675000 |
| Net Income |
|
90000 |
Question 4 What was the total standard cost of the ending inventory under absorption costing?
Solution:
| Selling price per unit |
$41 |
| Standard fixed manufacturing costs per unit |
$20 |
| Variable selling and administrative costs per unit |
$4 |
| Fixed selling and administrative cost per unit |
$16,000 |
| Beginning inventories: |
|
| Units |
? |
| Standard fixed manufacturing cost |
$40,000 |
| Standard variable manufacturing cost |
$20,000 |
| Units produced |
10,000 |
| Units sold |
9,600 |
| Total standard cost of the ending inventory under absorption costing |
|
| Ending inventory |
400 |
| Standard variable manufacturing cost (20000/10000*400) |
$800 |
| Standard fixed manufacturing cost |
$8,000 |
| Total standard cost of the ending inventory |
$8,800 |
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Question 5 The company produces the same number of units every month, although the sales in units vary from month to month. The company's variable costs per unit and total fixed costs have been constant from month to month.
Solution:
| Selling price |
$111 |
| |
|
| Units in beginning inventory |
400 |
| Units produced |
8,800 |
| Units sold |
8,900 |
| |
|
| Variable costs per unit |
|
| Direct materials |
$34 |
| Direct labour |
$37 |
| Variable manufacturing overhead |
$3 |
| Variable selling and administrative |
$9 |
| |
|
| Fixed costs |
|
| Fixed manufacturing overhead |
$61,600 |
| Fixed selling and administrative |
$169,100 |
i. Compute the total Contribution Margin.
| Compute the total Contribution Margin |
|
|
| Total Sales |
|
$987,900 |
| Less: Variable cost |
|
|
| Beginning Inventory |
29600 |
|
| Manufacturing cost |
651200 |
|
| Cost of Goods Available for Sale |
680800 |
|
| Less: Ending inventory (400+8800-8900)= 300 |
22200 |
|
| variable Cost of Goods Sold |
658600 |
|
| Less: variable selling & admin expenses |
$80,100 |
|
| Total variable cost |
|
$738,700 |
| Contribution margin |
|
$249,200 |
400* Total variable cost = (34+37+3) 74
ii. Compute the Operating Income under Variable Costing.
| Total Sales |
|
$987,900 |
| Less: Variable cost |
|
|
| Beginning Inventory |
$29,600 |
|
| Manufacturing cost |
$651,200 |
|
| Cost of Goods Available for Sale |
$680,800 |
|
| Less: Ending inventory (400+8800-8900)= 300 |
$22,200 |
|
| variable Cost of Goods Sold |
$658,600 |
|
| Less: variable selling & admin expenses |
$80,100 |
|
| Total variable cost |
|
$738,700 |
| Contribution margin |
|
$249,200 |
| Fixed manufacturing expense |
$61,600 |
|
| Fixed selling & admin expenses |
$169,100 |
|
| Total fixed cost |
|
$230,700 |
| Net Income |
|
$18,500 |
400* Total variable cost = (34+37+3) 74
iii. Prepare a reconciliation from your Variable Costing Operating Income to compute Operating Income under absorption costing.
| Total Sales |
|
$987,900 |
| Less: Variable cost |
|
|
| Beginning Inventory (assuming absorption rate to be same as current year) |
$32,400 |
|
| Manufacturing cost |
$712,800 |
|
| Cost of Goods Available for Sale |
$745,200 |
|
| Less: Ending inventory (400+8800-8900)= 300 |
$24,300 |
|
| Cost of Goods Sold |
|
$720,900 |
| Gross margin |
|
$267,000 |
| Less: Variable selling & admin expenses |
$80,100 |
|
| Fixed selling & admin expenses |
$169,100 |
|
| Total selling & admin expenses |
|
$249,200 |
| Net Income |
|
$17,800 |
|
|
|
| Reconcillation |
|
|
| Net Income under variable costing |
$18,500 |
|
| Add: fixed manufacturing overhead costs deferred in inventory under absorption costing |
2100 |
|
| Less: fixed manufacturing overhead costs released from inventory under absorption costing |
2800 |
|
| Net income under absorption costing |
$17,800 |
|
400* Total variable cost = (34+37+3+7) 81
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