Question

2. Haigwood Company has 120 units in Finished Goods Inventory at the beginning of the accounting period. During the accounting period, Haigwood produced 190 units and sold 310 units for $180 each. All units incurred $90 in variable manufacturing costs and $16 in fixed manufacturing costs. Haigwood also incurred $7,400 in Selling and Administrative Costs, all fixed. Calculate the operating income for the year using absorption costing and variable costing. Calculate the total product cost per unit produced under absorption costing and under variable costing. Absorption Variable costing costing Total product cost per unit Calculate the operating income for the year using absorption costing. Absorption costing Operating Income

Answer 1

  

Total Product cost per Unit :

Absorption Costing	Variable Costing
$ 106 ( $ 90 +$ 16)	$ 90

Operating Income Under Absorption Costing :

Particulars	Amount ($)
Sales (310 Units * $ 180)	55,800
Less : Cost of Goods Sold (310 Units*106)	32,860
Gross Profit	22,940
Less : Operating Expenses
General and Admin Expenses	7,400
Operating Income	15,540

Operating Income Under Variable Costing :

Particulars	Amount ($)
Sales (310 Units * $ 180)..........(a)	55,800
Less : Cost of Goods Sold
Opening Stock of Inventory ( 120 Units*90) (i)	10,800
Add : Good Produced ( 190 Units*90) (ii)	27,900
Less : Closing Stock (iii)	0
Cost of Goods Sold....(i+ii-iii) (b)
Gross Profit (a-b)	27,900
Less : Operating Expenses
Fixed General and Admin Expenses	7,400
Fixed Manufacturing Expenses (190 Units *$16 )	3,040
Operating Income	17,460

Under Absorption costing, fixed costs are absorbed according to units sold and thus, costs are calculated on basis of units sold. However in variable costing, costs are segregated under fixed and variable costing and all costs are recognized in current period only. The main reason of difference between profits under absorption and variable costing is due to inventory valuation. Under absorption costing, valuation is higher due to inclusion of fixed costs in inventory. In variable costing, fixed costs are not included in inventory value.