Reeses Tot Toy Boxes uses variable costing to manage its internal operations. Th

Question

Reeses Tot Toy Boxes uses variable costing to manage its internal operations. The following data relate to the company's first year of operation, when 25,000 units were produced and 21,000 units were sold:
Variable costs per unit
Direct Material $50
Direct Labor $30
Variable Overhead $14
Variable selling cost $12
Fixed Costs
Selling and Admin $750,000
Manufacturing $500,000
Q: How much higher (or lower) would the company's first-year net income have been if absorption costing had been used rather than variable costing? Show Computations please.

Explanation / Answer

it w Under absorption costing, costs incurred in the nonmanufacturing areaas of the organization are considered period costs and are expensed in a manner that properly matches them with revenues. Direct materials 25000*$50=1,250,000 Direcy labor 25000*$30=$750,000 Variable Overhead 25000*$14=$350,000 Fixed Manufacturing Overhead $500,000 Total $2,850,000/25,000=$114 absorp. cost per Unit $2,350,000/25,000=$94 variable cost per unit The variance between variable and absorptioon costing in net income would be caused by the difference in treatment of fixed manufacturing overhead Fixed overhead would be expensed totaly under variable costing ----$500,000 Under absorbtion costing it would be prorated 500,000 *(21000/25000)=420,000 So, under absorption costing NI will be 80,000 higher.

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