Question

Messimer manufactures a single product and sells it for $10 per unit. At the beginning of the year, there were 1,000 units in inventory. Upon further investigation, you discover that units produced last year had $3.00 of fixed manufacturing cost and $2.00 of variable manufacturing cost. During the year, Messimer produced 10,000 units of product.  Each unit produced generated $3.00 of variable cost. The total fixed manufacturing cost for the current year was $40,000. There were no inventories at the end of the year.

Required: Prepare two income statements for the current year, one using Variable Costing and the other using Absorption Costing. Explain any difference between the two net income numbers and provide calculation supporting your explanation of the difference.

Answer 1

Variable Costing
Sales	110,000	[11000*10]
Less: variable costs	32000	(1000*2)+ (10000*3)
Contribution margin	78,000
Less: Fixed costs	40000
Net Income	38,000

Absorption Costing
Sales	110,000	[11000*10]
Less: variable costs	32000	(1000*2)+ (10000*3)
Contribution margin	78,000
Less: Fixed costs	43000	(1000*3)+40,000
Net Income	35,000

Difference = 38,000 -35,000 = 3000

The difference is due to the fixed manufacturing costs of $3000 ( 1000 *$3) incurred on the opening stock since variable costing assumes that the fixed costs are accounted for in the year of manufacture itself.