Question

N a blete Anle USA habis-old for $1,000 LC per unit in two markets: the USA and China. The company's fiscal 2017 operations data were as follows: - Sales 35.00 units - Production 40,000 units - Manufacturing Cost per unit: Direct Materials $ 150 Direct Labor $ 100 Variable Manufacturing Overhead $ 20 Fixed manufacturing Overhead $8,000,000 Selling and Administrative Expenses: Fixed for the year Variable expenses per unit $ 4,000,000 $ 30 • Required: 1) Under Variable Costing. a) What is the unit product cost? [4 marks) b) What is the fiscal 2017 net operating income? [16 marks] 2) Under absorption costing. a) What is the unit product cost? (5 marks] b) What is the fiscal 2016 net operating income? [10 marks 3) What is the amount of the difference between the variable costing and absorption costing net operating incomes? Explain the cause of this difference? (5 marks]

Answer 1

1) Under variable costing:

Unit product cost is computed as:

Amount Particulars Direct material Direct labor Variable manufacturing overhead Unit product cost $150 $100 $20 $270

Net operating income is computed as:

Amount $35,000,000 Income statement (variable costing) Particulars Sales (35,000 units*100) Less: Variable expenses Variable cost of goods sold (35000 units*$270) Variable selling expense (35,000 units*30) Contribution margin Less:fixed expenses Fixed manufacturing overhead Fixed selling and administrative Net operating income $9,450,000 $1,050,000 $24,500,000 $8,000,000 $4,000,000 $12,500,000

2) Under absorption costing:

Unit product cost is computed as:

Particulars Direct materials Direct labor Variable manufacturing overheads Fixed Manufactring overhead Unit product cost Amount $150 $100 $20 $200 $470

*fixed manufacturing overhead=8,000,000/40,000=$200

Net operating income is computed as:

Income statement(absorption costing) Paticulars Amount Sales(35,000*1000) $35,000,000 Less: Cost of goods sold(35000*470) $16,450,000 Gross margin $18,550,000 Selling and administrative expenses(35,000*30) +4,000,000 $5,050,000 Net operating income $13,500,000

3.The amount of difference between net operating income under the method of absorption costing and under variable costing is $1,000,000.($13,500,000-$12,500,000)

With the increase in the level of inventory the operating income under the method of absorption costing would be higher than variable costing.As under variable costing the  manufacturing overheads(fixed) are charged to period cost whereas under absorption costing the manufacturing overheads(fixed) are considered as a part of inventory cost that cannot be expensed until sold, thus absorption costing shows a higher income due to less expenses.