Thread: 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.

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...