Answer:
M Co.
1. Absorption and Variable Costing Income Statements:
Absorption Costing Variable Costing
Sales Revenue $1,800,000 $1,800,000
Product Cost of goods sold:
Beginning Inventory 130,000 120,000
Period's Production cost 675,000 (805,000) 625,000
Variable Selling & Administration expenses 65,000 (810,000)
Contribution $990,000
Gross profit $995,000
Period Costs:
Beginning Inventory overhead 10,000
Fixed factory overhead 50,000
Selling & Admin expenses (110,000) 45,000 (105,000)
Net Income $885,000 $885,000
2a. Determination of difference in income from part 1:
Absorption costing has a gross profit of $995,000
While variable costing has a contribution of $990,000
Their net income is the same at $885,000
2b. Reason for difference in income from part 1:
The reason for the difference is that absorption costing calculates gross profit, which includes all the costs of production (variable and fixed) in the cost of goods sold, while variable costing system calculates contribution, which includes only the variable costs in the cost of goods sold with fixed costs treated as period costs for arriving at the net income.
We would have noticed some differences in the Net Income under absorption and variable costing systems if there had been some ending inventory.
Explanation:
Data and Calculations:
1. Sales = 30,000 units at $60 per unit = $1,800,000
Beginning inventory = 5,000 units
Production during the year = 25,000
2. Production costs and Expenses:
Number of Units Unit costs Total Costs
Beginning inventory: 5,000
Direct materials 5,000 $6.70 $ 33,500
Direct labor 5,000 15.50 77,500
Variable factory overhead 5,000 1.80 9,000
Fixed factory overhead 5,000 2.00 10,000
Variable unit cost = $24 ($6.70 + 15.50 + 1.80)
Variable cost = $120,000 (5,000 x $24)
Total cost = $130,000 ($120,000 + 10,000)
Current period costs:
Direct materials 25,000 7.00 $ 175,000
Direct labor 25,000 16.20 405,000
Variable factory overhead 25,000 1.80 45,000
Fixed factory overhead 25,000 2.00 50,000
Variable cost per unit = $25 ($7.00 + 16.20 + 1.80)
Total variable cost = $625,000 (25,000 x $25)
Total absorption cost = $675,000 ($625,000 + 50,000)
Selling and administrative expenses:
Variable $ 65,000
Fixed 45,000
Total selling and administrative expenses $110,000
