Q2: Variable and Absorption costing

Fagan Manufacturing uses an absorption costing system. In 2009 it manufactured 25,000 units and sold 20,000 units at $45 each. The companys income statement for year ended December 31 2009 is as follows:

FAGAN MANUFACTURING COMPANY INCOME STATEMENT FOR THE YEAR ENDING DECEMBER 31, 2009
Sales			$900,000
Cost of goods sold:
Finished goods inventory, January 1	$ 0
Cost of goods manufactured	812,500
Goods available for sale	$812,500
Finished goods inventory, December 31	162,500
Cost of goods sold			650,000
Gross margin			$250,000
Less Operating expenses:
Selling	$135,000
Administrative	30,000
Total selling and administrative			165,000
Operating profit			$85,000

The following additional information is available:

Variable costs per unit:

Direct materials $ 9.50

Direct labor 12.00

Manufacturing overhead 4.00

Selling expenses 5.50

Fixed costs for the period:

Manufacturing overhead $175,000

Selling 25,000

Administrative 30,000

REQUIRED

Show ALL necessary workings

(a) When absorption costing was used, how much fixed manufacturing overhead was deferred in finished goods inventory? (5 marks)

(b) Prepare an income statement using variable costing. (15 marks)

(c) Reconcile the profit on the variable costing income statement with the profit shown on the absorption costing income statement. (5 marks)