Question

Variable-Costing and Absorption-Costing Income

Borques Company produces and sells wooden pallets that are used for moving and stacking materials. The operating costs for the past year were as follows:

Variable costs per unit:
Direct materials	$ 2.85
Direct labor	$ 1.92
Variable overhead	$ 1.60
Variable selling	$ 0.90
Fixed costs per year:
Fixed overhead	$180,000
Selling and administrative	$ 96,000

During the year, Borques produced 200,000 wooden pallets and sold 204,300 at $9 each. Borques had 8,200 pallets in beginning finished goods inventory; costs have not changed from last year to this year. An actual costing system is used for product costing.

Required: 1. What is the per-unit inventory cost that is acceptable for reporting on Borques's balance sheet at the end of the year? How many units are in ending inventory? units What is the total cost of ending inventory? $ 2. Calculate absorption-costing operating income. $ 3. What would the per-unit inventory cost be under variable costing? Round your answer to the nearest cent. Does this differ from the unit cost computed in Requirement 1? 4. Calculate variable-costing operating income. $ 5. Suppose that Borques Company had sold 196,700 pallets during the year. What would absorption-costing operating income have been? What would variable-costing operating income? $

Answer 1

Answer with explanation:

Variable cost Per Unit Direct Materials Direct Labour Variable OH Total Variable Manufacturing cost Variable Selling $2.85 $1.92 $1.60 $6.37 $0.90 Fixed Manufacturing Cost - Absorption Rate Fixed Overhead $1,80,000 No. of Units Produced 200000 Absorption Rate Per Unit $0.90 Selling and Administrative $96,000

1.

Per unit acceptable inventory cost = Variable Manufacturing cost per unit + Fixed OH Absorption Rate per unit = $6.37 + $0.90 = $7.27

Ending Inventory Units = Opening units + Produced Units - Sold units

=8,200 + 200,000 - 204,300 = 3,900

Total Cost of Ending Inventory = Ending Inventory units × Cost per unit = 3,900 × $7.27 = $28,353

2. Absorption costing operating income:

$1,838,700 Sales Less: Cost of Goods sold: Beginning Inventory Production during the year Cost of Goods available for sale -Ending Inventory Gross Profit Less: Selling and Administrative Expense Variable (204,300*$0.90) Fixed Net Operating Income $59,614 $14,54,000 $1,513,614 -$28,353 $14,85,261 $3,53,439 $1,83,870 $96,000 -$279,870 $73,569

Sales = Units sold × Selling price per unit = 204,300 × $9 = $18,38,700

Cost of beginning inventory = Units at the beginning × Inventory cost = 8,200 × $7.27 = $59,614

Cost of production during the year =Units produced during the year × Inventory cost = 200,000 × $7.27 = $1,454,000

Cost of ending inventory = Units at the end × Inventory cost = 3,900 × $7.27 = $28,353

3. Per unit cost under variable costing = $6.37

(Under Variable costing, the per unit cost of the product is determined on the basis of variable costs per unit.)

Does this differ from the unit cost computed in Requirement 1?

Yes.

(Absorption costing considers the absorbed fixed manufacturing overhead as part of per unit cost. But variable costing will not consider that.)

4. Variable costing operating income:

Sales Less: Variable Expenses Gross Contribution Margin Less:Variable Selling and Administrative Expense Contribution Margin Less Fixed Costs: Fixed Overhead Selling and Administrative Net Operating Income $1,838,700 $1,301,391 $537,309 -$183,870 $353,439 $353,439 $180,000 $96,000 -$276,000 $77,439

Sales = Units sold × Selling price per unit = 204,300 × $9 = $18,38,700

Variable Expenses = Units sold × Variable manufacturing cost per unit = 204,300 × $6.37 = $1,301,391

Variable selling Expense = Units sold × Variable selling cost per unit = 204,300 × $0.90 = $183,870

5. Absorption costing operating income:

$1,770,300 Sales Less: Cost of Goods sold: Beginning Inventory Production during the year Cost of Goods available for sale -Ending Inventory Gross Profit Less: Selling and Administrative Expense Variable Fixed Net Operating Income $59,614 $14,54,000 $1,513,614 -$83,605 -1,430,009 340,291 $177,030 $96,000 -$273,030 $67,261

Sales = Units sold × Selling price per unit = 196,700 × $9 = $1,770,300

Cost of beginning inventory = Units at the beginning × Inventory cost = 8,200 × $7.27 = $59,614

Cost of production during the year =Units produced during the year × Inventory cost = 200,000 × $7.27 = $1,454,000

Cost of ending inventory = Units at the end × Inventory cost = 11,500 × $7.27 = $83,605

(Ending inventory = Beginning + Produced during the year - Sold = 8,200 + 200,000 - 196,700 = 11,500)

Variable costing operating income:

Sales Less: Variable Expenses Gross Contribution Margin Less:Variable Selling and Administrative Expense Contribution Margin Less Fixed Costs: Fixed Overhead Selling and Administrative Net Operating Income $1,770,300 $1,252,979 $517,321 -$177,030 $340,291 340,291 $180,000 $96,000 -$276,000 64,291

Sales = Units sold × Selling price per unit = 196,700 × $9 = $1,770,300

Variable Expenses = Units sold × Variable manufacturing cost per unit = 196,700 × $6.37 = $1,252,979

Variable selling Expense = Units sold × Variable selling cost per unit = 196,700 × $0.90 = $177,030