Hi,

I have been going over this problem for hours and would greatly appreciate any help.

Here is the data:

March 2012 April 2012 Beginning Inventory Nil 150 Units Production 500 Units 400 Units Sales 350 Units 520 Units Variable Cost Data: Manufacturing cost per unit produced $100 $100 Operating Cost (Non-manufacturing Costs) per unit sold $30 $30 Fixed Cost Data: Manufacturing Costs $20 000 Operating Costs (Non-manufacturing Costs) $6 000 Selling Price per unit $240 Stocks are valued on First In First Out (FIFO) basis.

I need to calculate the net profit using both absorption and variable costing methods.

This is my working:

Absorption costing

April 2012 Sales (520 x $240) $124,800 Less: Cost of Goods Sold Variable manufacturing costs ($100 x 520) 52,000 Fixed manufacturing costs ($20,000/500 x 150)+($20,000/400 x 370) 24,500 Cost of Goods Sold 76,500 Gross Profit 48,300 Less: Operating costs Variable operating costs ($30 x 520) 15,600 Fixed operating costs 6,000 Total operating costs 21,600 Net Profit$26,700**

Variable costing

April 2012 Sales (520 x $240) $124,800 Less: Variable costs Variable manufacturing costs ($100 x 520) 52,000 Variable operating costs ($30 x 520) 15,600 Total variable costs 67,600 Contribution margin 57,200 Less: Fixed costs Fixed manufacturing cost 20,000 Fixed operating costs 6,000 Total fixed costs 26,000 Net Profit$31,200**

The profit difference between these 2 methods is $4,500 ($31,200 - $26,700).

However when I try and reconcile income using the formula (Difference in income = Change in inventory units x Fixed overhead rate per unit)

ie. (120 units x $40($20,000/500)) I get an answer of $4,800, which is $300 greater than the profit difference calculated above.

Can someone please explain to me why this is the case and what I am doing wrong?

Thankyou.