Question

Variable and Absorption Costing
Chandler Company sells its product for $116 per unit. Variable manufacturing costs per unit are $51, and fixed manufacturing costs at the normal operating level of 12,000 units are $240,000. Variable selling expenses are $24 per unit sold. Fixed administrative expenses total $104,000. Chandler had no beginning inventory in 2016. During 2016, the company produced 12,000 units and sold 9,000. Would net income for Chandler Company in 2016 be higher if calculated using variable costing or using absorption costing?

Calculate reported income using each method.
Do not use negative signs with any answers.

Absorption Costing Income Statement
Sales				Answer
Cost of Goods Sold:
Beginning Inventory			Answer
Variable Costs			Answer
Fixed Costs			Answer
Less: Ending Inventory			Answer
Cost of Goods Sold				Answer
AnswerContribution marginGross profitLess: Ending inventoryManufacturing costSelling expenseVariable selling expense				Answer
AnswerContribution marginGross profitLess: Ending inventoryManufacturing costSelling expenseVariable selling expense				Answer
Administrative expense				Answer
Net Income				Answer

Variable Costing Income Statement
Sales				Answer
Cost of Goods Sold:
Beginning Inventory			Answer
Variable Costs			Answer
AnswerContribution marginGross profitLess: Ending inventoryManufacturing costSelling expenseVariable selling expense			Answer
Variable cost of goods sold				Answer
AnswerContribution marginGross profitLess: Ending inventoryManufacturing costSelling expenseVariable selling expense				Answer
AnswerContribution marginGross profitLess: Ending inventoryManufacturing costSelling expenseVariable selling expense				Answer
Fixed costs:
AnswerContribution marginGross profitLess: Ending inventoryManufacturing costSelling expenseVariable selling expense			Answer
Administrative Expense			Answer
Total Fixed Cost				Answer
Net Income				Answer

Answer 1

Absorption Costing Income Statement
		Units	Rate	Amount	Amount
Sales		9,000	116		1,044,000
Less : Cost of Goods Sold
Beginning Inventory	0		0
Variable Costs	12,000	51	612,000
Fixed Costs	12,000	20	240,000
Less: Ending Inventory	3,000	71	213,000
Cost of Goods Sold				639,000
Gross Profit				405,000
Less : Adminstration & Selling Cost
Administrative expense			104,000
Selling Expenses	9,000	24		216,000
Net Income				85,000
Normal Operating Capacity ( In Units )		12,000
Actual Production ( In Units )			12,000
Absorption Rates
Fixed Manufacturing Absorbtion Rate		20	( Fixed Cost / Normal Production )
Variable Manufacturing Absorbtion Rate		51	( Given )
Total Manufacturing Cost per unit		71

Variable Costing Income Statement
		Units	Rate	Amount
Sales		9,000	116	1,044,000
Less : Total Variable Cost
Manufacturing Cost	9,000	51	459,000
Selling Cost	9,000	24	216,000
				675,000
Contribution			369,000
Less : Fixed Cost
Manufacturing			240,000
Administrative			104,000
				344,000
Net Income			25,000

The Net Income is higher in Absorption Costing as the unsold production cost is carried forward to next period in the form of Ending Inventory.