Question

Bright Lighting Company had net income for the first 10 months of the current year of $300,000. One hundred thousand units were manufactured during this period, and 100,000 units were sold. Fixed manufacturing overhead was $3,000,000 over the 10- month period (i.e., $300,000 per month). There are no selling and administrative expenses for Bright Lighting Company. Both variable and fixed costs are expected to continue at the same rates for the balance of the vear (i.e. fixed costs at $300,000 per month and variable costs at the same variable cost per unit). There were 10.000 units in inventory on October 31. Twenty thousand units are to be produced and 19,000 units are to be sold in total over the last two months of the current year. Assume the unit variable cost is the same in the current year as in the previous year. (Hint: You cannot calculate revenue or cost of goods sold; you must work directly with contribution margin or gross margin.) Required: 1. If operations proceed as described, will net income be higher under variable or absorption costing for the current year in total? Why? 2. If operations proceed as described, what will net income for the year in total be under (a) variable costing and (b) absorption costing? (Ignore income taxes.) 3. Discuss the advantages and disadvantages of absorption and variable costing.

Answer 1

Requirement Absorption Costing net inome wit be higher number becawe As units produced is more than number units Sold, Some te dxed manyaukwring overhaad would be dyevad to next pestod thoaugh number Unit unsold under absor plion losthg Undar estthg Lost Variable ful jixed manaturing Cosks would be charged period lost. &o net inome would to inuome statemenk as a be higher under absorption tosting.

Requirement 23PAS JAo a) Vaiable Costing Net income for lo months 9t0G Bdd Fixed manyou $300, 000 3,0 oo, 000 9 1 overkead dei lo month 1otal Contibulion margih fou to months $ 3,300, o00 Unit manyatkued and sold Contibulion maxgin per Unit Unit Sold durhgmonths Total Conteibution magin o 2 months Leu) fixed cos to 2 months Net income tor months -Vaiable tostng$2000 $33 19,000 १ २२,००० (600,000) 0f i6 So Net income dor 12 munlts Vaiable Coshing 300,000+ 27000) $ 321,000 Absorption Lasli 09418 ol 2month$ 600,000 overhead Fixed Unit producedduning 2months fixed manuyatuina ovehead 20000 Uni pe $ 30 Unit sold duringmonths fixed manyja duning 1000 overhead deferred $30,000 Theryore Total Contribulion margih Jar amonth ৫२१,००० s) fixed manyjeturin overhuad Ja 2mont s57900u) Net inuome doi 2 month Abtoptfon ashinn 9 57,000 &o Net in tome da 12 month Absorption Costhny 300,000-+ 87,00o S 357000