Question

ABC Corporation produces one single product. The sales price and product cost are listed below:

Sales price is $15 per unit
Variable Selling, G &A is $2.00 per unit
Direct Material is $2.50 per unit
Direct Labor is $1.00 per unit
Variable Manufacturing Factory Overhead is $.50 per unit
Fixed Selling G&A is $14,000
Fixed Manufacturing Factory Overhead is $20,000

During its first year of operations, the company produced 5,000 units and sold 3,800 units. Assume there is no beginning and ending work-in-process inventory.

Prepare a reconciliation between absorption costing and variable costing to analyze the net operating income difference. (That is prepare a word table (similar to a spreadsheet) to reconcile the difference. Do not state the difference but how is the difference computed)

Answer 1

Variable cost = (2+2.50+1+.50)*3800 = 22800

Net operating income under variable costing = (15-6)*3800-(14000+20000) = 200

Absorption Costing net income = (2+2.50+.50+20000/5000) = (15-9)*3800-(3800+14000) = 5000

Prepare a reconciliation between absorption costing and variable costing to analyze the net operating income difference.

Variable costing net operating income	200
Add: Fixed manufacturing overhead cost deferred in ending inventory (4*1200)	4800
Absorption costing net operating income	5000