The Rocktown Beverage Company experienced the following costs in 2007 (assume th

Question

The Rocktown Beverage Company experienced the following costs in 2007 (assume the same unit costs in all years):
Direct materials $4.85/unit
Direct labor $2.10/unit
Manufacturing Overhead Costs
Variable $2.25/unit
Fixed $75,075
Selling & Administrative Costs
Variable selling $.95/unit
Fixed selling $8,000
Fixed administrative $2,000

There were 6,000 units in beginning inventory. During the year the company manufactured 45,500 units and sold 48,000 units. If net income using variable costing was $82,500, what is net income using full costing?
Answer

Explanation / Answer

Reconciliation of Variable costing with Absorption costing Income: As noted earlier, variable costing net operating incomes may not be the same. These differences occur becasue under absorption costing some fixed manufacturing overhead is capitalized in inventories rather than currently expensed on the income statement. In general, when the units sold exceed units produced income under absorption costing will be lower. This occurs because some of the fixed manufacturing overhead from the previous periods is released from inventories under absorption costing. Difference amount is calculated as: Difference of Ending inventory and Beginning inventory. we know the number of units in beginning inventory are 6,000 Fixed manufacturing overhead = $75,075 / 45,500 = $1.65 Calculating the number of units in Ending inventory: Ending inventory = Beginning inventory + Units manufactured - Units sold = 6,000 + $45,500 - 48,000 = 3,500 Ending inventory = number of units in fixed manufacturing overhead * Per unit = 3,500 * $1.65 = $5,775 Beginning inventory = 6,000 * $1.65 = $9,900 Therefore, the difference of ending inventory and beginning inventory is ($5,775 - $9,900) = -$4,125 Therefore, this difference amount should be deduccted from variable costing income to arrive at absorption costing income. Absorption costing income = $82,500 - $4,125 = $78,375 Therefore, the correct option is 1) $78,375

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