13-B3 Comparison of Variable Costing and Absorption Costing Consider the followi

Question

13-B3 Comparison of Variable Costing and Absorption Costing

Consider the following information pertaining to a year’s operations of Youngstown Manufacturing:
Units sold 1,400
Units produced 1,600
Direct labor $4,200
Direct materials used 3,500
Fixed manufacturing overhead 2,200
Variable manufacturing overhead 300
Selling and administrative expenses (all fixed) 700
Beginning inventories 0
Contribution margin 5,600
Direct-material inventory, end 800
There are no work-in-process inventories.
1. What is the ending finished-goods inventory cost under absorption costing?
2. What is the ending finished-goods inventory cost under variable costing?

Explanation / Answer

Units in beginning inventory 0 Units produced 1,600 Units sold 1,400 Units in ending inventory 200 1.Under Absorption Costing Direct materials 3,500 Direct labor 4,200 Variable manufacturing overhead                300 300 Total variable costs 8,000 Fixed costs Fixed manufacturing overhead 2,200 Fixed selling and administrative 700 Total Fixed costs 2,900 Total Cost 10,900 Total units produced 1,600 Unit cost= 10,900/1,600 6.81 Ending inventory cost 200*6.81 1,362 2.Under Variable Costing Direct materials 3,500 Direct labor 4,200 Variable manufacturing overhead 300 Total variable costs 8,000 Fixed manufacturing ovehead, fixed selling and administrative expenses are not treated as a product cost under this method. Total Cost 8,000 Total units produced 1,600 Unit cost= 8,000/1,600= 5 Ending inventory cost= 200*5= 1,000

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