Question

Altoona Valve Company’s planned production for the year just ended was 18,800 units. This production level was achieved, and 21,000 units were sold. Other data follow:

Direct material used	$	575,280
Direct labor incurred		272,600
Fixed manufacturing overhead		404,200
Variable manufacturing overhead		206,800
Fixed selling and administrative expenses		325,240
Variable selling and administrative expenses		91,180
Finished-goods inventory, January 1		2,700	units

The cost per unit remained the same in the current year as in the previous year. There were no work-in-process inventories at the beginning or end of the year.

Required:

1.	What would be Altoona Valve Company’s finished-goods inventory cost on December 31 under the variable-costing method? (Do not round your intermediate calculations.)

2-a.

Which costing method, absorption or variable costing, would show a higher operating income for the year?

	Absorption costing
	Variable costing

2-b.	By what amount? (Do not round your intermediate calculations.)

Answer 1

Ans. 1	Ending finished goods inventory cost = Ending inventory units * Variable unit product cost
	500 * $56.10
	$28,050
Ans. 2	Variable costing method
	Explanations: when the units produced are less than units sold or the units in
	beginning inventory are greater then the units in ending inventory then the
	income under variable costing is greater than absorption costing.
Ans. 3	Difference in reported income = Fixed overhead per unit * (Units produced - Units sold)
	$21.50 * (18,800 - 21,000)
	$21.50 * (-2,200)
	-$47,300
	*Working Notes:
	Ending inventory units = Beginning inventory units + Production - Units sold
	2,700 + 18,800 - 21,000
	500 units
	Calculations of Variable unit product cost :
	Particulars	Amount
	Direct materials used	$575,280
	Direct labor incurred	$272,600
	Variable manufacturing overhead	$206,800
	Total variable manufacturing cost	$1,054,680
	Variable unit product cost = Variable manufacturing cost / Units produced
	$1,054,680 / 18,800
	$56.10	per unit
	Fixed overhead per unit = Fixed manufacturing overhead / Units produced
	$404,200 / 18,800
	$21.50	per unit