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Math Help - Absorption and Variable Costing (Accounting) - Please Help

  1. #1
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    Absorption and Variable Costing (Accounting) - Please Help

    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.
    Last edited by oscar123; September 25th 2012 at 05:35 AM.
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  2. #2
    Newbie rudsdiey's Avatar
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    Re: Absorption and Variable Costing (Accounting) - Please Help

    Hi Oscar,

    First, you need to find the Unit Product Cost (UPC) for both Absorption Costing (AC) and Variable Costing (VC).

    UPC for AC
    = Variable Manufactured cost + (Fixed Manufactured cost / Production)
    = $100 + ($20 000 / 400 units)
    = $100 + $50
    = $150

    UPC for VC
    = Variable Manufactured cost
    = $100


    Second, you forgot to put Beginning Inventory (BI) for both AC and VC.

    BI for AC
    = 150 units x UPC for AC
    = 150 units x $150
    = $22 500

    BI for VC
    = 150 units x UPC for VC
    = 150 units x $100
    = $15 000

    Third, you put the wrong value of reconcile income.
    (Difference in income = Change in inventory units x Fixed overhead rate per unit)
    Fixed overhead rate per unit should be $20,000/400

    Here's the summary.

    Absorption costing; Net Profit = $25 200
    Variable costing; Net Profit = $31 200
    Profit difference = $6 000

    Reconcile the difference in income for AC and VC
    = Change in inventory units x Fixed overhead rate per unit
    = 120 x (20000/400)
    = 120 x 50
    = $6 000



    Cheers...
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