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.

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...