ASSIGNMENT #4 (Part 1)

Absorption vs. Variable Costing Assignment

A Company

This is the first year so there is no beginning inventory.

BUDGETED:

Sales 6,000 units [at $30 per unit]

Production 7,000 units

Variable mfg. cost $10 per unit [DM-$5; DL-$3; Var. mfg. overhead-$2]

Fixed mfg. cost $ 4 per unit [based on planned production of 7,000 units]

Var. S&A cost $ 1 per unit [based on units sold]

Fixed S&A cost $ 2 per unit [based on planned sales of 6,000 units]

ACTUAL:

Sales 6,200 units @ $30

Production 6,400 units

There were no efficiency variances.

There were no material, labour or variable overhead spending variances.

There were no fixed S&A spending variances. We spent the same as budgeted.

There was a $2,000 unfavourable fixed overhead spending variance.

Fixed overhead denominator variance must be calculated.

REQUIRED:

1. Compute net income using Absorption costing.
2. Compute net income using Variable (direct) costing.
3. Reconcile the difference in net income.