Question

You use absorbsion costing. Last month, you produced 12,000 units, your beginning finished goods inventory was 2000 units and your ending inventory was 1000 units. Standard variable manufacturing costs are $3 /unit. Fixed manufacturing costs are budgeted at $40,000. Cost driver volume was 5,000 machine hours. The standard usage rate is ½ hr per unit. Calculate adjusted absorbs ion COGS. Calculate variable costing COGS. Which is higher and by what amount?

Answer 1

Cost of goods sold under absorption costing
Units produced				12000	Amount in $	Per unit
Variable manufacturing costs					36000	3
Fixed overhead					48000	4
Total cost of manufacturing					84000	7
Add : Beginning inventory
Units				2000	14000	7
Total goods available for sale				14000	98000	7.00
Less : Ending Inventory
units				1000	7000	7.00
Total cost of goods sold				13000	91000	7.00
Cost of goods sold under variable costing
Units produced				12000	Amount in $	Per unit
Variable manufacturing costs					36000	3
Add : Beginning Inventory				2000	6000	3
Goods available for sale				14000	42000	3
Less : Ending Inventory				1000	3000	3
Total cost of goods sold				13000	39000	3
Note : difference is due to inclusion of fixed overhead into cost of goods sold calculation.