A 1 Problem 4 2 3 C D E F G H J K L M N P Q R S T A business operated at 100% of capacity during its first month and provided following information: 4 Number of units produced: 5,000 units $ 5 Production costs (5,000 units): 6 Direct materials 7 Direct labor 8 Variable factory overhead 9 Fixed factory overhead 10 Operating expenses: 11 Variable operating expenses 12 Fixed operating expenses 13 $70,000 20,000 10,000 2,000 $102,000 $17,000 1,000 18,000 14 1,000 units remain unsold at the end of the month and sales total $150,000 for the month. 15 16 Required: 17 Calculate: 18 A. Income from operations and Ending inventory under the Absorption costing. 19 B. Income from operations and Ending inventory under the Variable costing. 20 C. Explain the difference in income under the two costing systems. 21 22 Solution: 23 A. Absorption costing 24 Product costs per unit 25 Sales 26 COGS 27 Gross profit 28 Operating expenses 29 Income from operations 30 31 Ending inventory $20.40 per unit $150,000 $81,600 $68,400 $18,000 $50,400 $20,400.00 32 33 A. Variable costing 34 Product costs per unit 35 Sales 36 Total variable costs (VCOGS + VSA) 37 Contribution margin $20.00 per unit $150,000 $97,000 $53,000 38 Total fixed costs (Fixed OH + FSA) $3,000 39 Income from operations $50,000 40 41 Ending inventory $20,000 42 43 C. 44 Answer: 45 46 47 48 49 The Absorption costing income is $400 more than the variable costing income, because this $400 represents the Fixed factory overhead which is tied to the 1,000 units of ending inventory and hence not expensed in the income statement. Calculation: Fixed factory overhead per unit = $2,000/5,000 units = $0.40 per unit to the Fixed FOH tied to the ending inventory = $0.40 x 1,000 units = $400. 50 Siddique, Salina: NI Sales COGS- Operating expenses Siddique, Salina: Ending inventory Product cost/unit x # of ending inventory Siddique, Salina: NI Sales TVC-TFC