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Example – Variable vs. Full Absorption Costing A company that uses a FIFO inventory system and...

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   

Business   Accounting   
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Homework Answers

Answer #1

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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