Example – Variable vs. Full Absorption Costing
A company that uses a FIFO inventory system and began operations in Year 1 has the following information.
Year 1 Year 2
Sales units 8,000 10,000
Selling price $45 $46
Production units 12,000 8,000
Unit direct material cost $2.00 $2.00
Unit direct labor cost $1.00 $1.00
Unit commission cost $.50 $.50
Annual Fixed Overhead $180,000 $180,000
Annual Fixed S,G,&A $140,000 $150,000
1. What are the inventoriable cost per unit in years 1 and 2?
Absorption Costing Variable Costing
2. What would the income statements look like?
Absorption Costing Variable Costing
1. Inventory Cost per Unit
Absorption Costing
Year 1 = Unit Material Cost + Unit Labor cost + Fixed OH / Production Units
Year 1 = $2 + $1 + $180000 / 12000 = $2 + $1 + $15 = $18 per unit
Year 2 = Unit Material Cost + Unit Labor cost + Fixed OH / Production Units
Year 2 = $2 + $1 + $180000 / 8000 = $2 + $1 + $22.50 = $25.50 per unit
Variable Costing
Year 1 = Unit Material Cost + Unit Labor cost
Year 1 = $2 + $1 = $2 + $1 = $3 per unit
Year 2 = Unit Material Cost + Unit Labor cost
Year 2 = $2 + $1 = $2 + $1 = $3 per unit
2. Income Statement
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