The Parsons Company experienced the following costs in 2007: Direct materials $4

Question

The Parsons Company experienced the following costs in 2007: Direct materials $4.50/unit Direct labor $8.00/unit Manufacturing Overhead Costs Variable $2.00/unit Fixed $150,000 Selling & Administrative Costs Fixed selling $15,000 Variable selling $1.50/unit Fixed administrative $10,000 During the year the company manufactured 60,000 units and sold 55,000 units. If net income for the year was $114,000 using full costing, what would net income be if the company used variable costing? Assume no beginning inventories. A. $94,000 B. $134,000 C. $126,500 D. $101,500

Explanation / Answer

The above problem is based on the Difference between Absorption(full cost) and Marginal Cost Accounting methods. The answer is based on the two blow stated rules 1)Both fixed and Variable costs are considered in closing stock valuation in Full cost but only variable costs in Marginal costing 2) fixed costs are charged to total production in Full cost but only to sales in Marginal costing. Based on the above rules the calculations are done in excel but it helps you understand the process followed.the answer is below Full/Absorption costing Particulars Rate per unit($) units Amount($) Direct Material 4.5 60000 270000 Direct Labour 8 60000 480000 Variable MFG Overhead cost 2 60000 120000 variable selling 1.5 60000 90000 Fixed Costs Fixed Costs 150000 selling fixed 15000 Admin fixed 10000 total cost of production 18.91666667 60000 1135000 less : Clsoing stock 18.91666667 5000 94583.33333 1040416.667 Add : Profit as given 114,000 Sales for year 20.98939394 55000 1154416.667 Sale price per unit is determined from the above calculation and is used for determining the Net profit under Marginal cost. Marginal Costing Particulars Rate per unit($) units Amount($) Total Amount($) sales 20.9894 55000 1154417 Less Direct Material 4.5 Direct Labour 8 Variable MFG Overhead cost 2 variable selling 1.5 Total variable Production cost 16 60000 960000 Less: closing stock cost 16 5000 80000 880000 Total Contribution 274417 Fixed Costs Fixed Costs 150000 selling fixed 15000 Admin fixed 10000 175000 Net profit as per marginal costing 99417 Hence, the answer D ($101,500 ) may be probably right one to consider.

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