Diego Company manufactures one product that is sold for $71 per unit in two geog

Question

Diego Company manufactures one product that is sold for $71 per unit in two geographic regions-the East and West regions. The following information pertains to the company's first year of operations in which it produced 54,000 units and sold 49,000 units Variable costs per unit: Manufacturing: Direct materials 12 3 5 Direct labor Variable manufacturing overhead Variable selling and administrative Fixed costs per year: Fixed manufacturing overhead Fixed selling and administrative expense $864,000 586,000 The company sold 36,000 units in the East region and 13,000 units in the West region. It determined that $280,000 of its fixed selling and administrative expense is traceable to the West region, $230,000 is traceable to the East region, and the remaining $76,000 is a common fixed expense. The company will continue to incur the total amount of its fixed manufacturing overhead costs as long as it continues to produce any amount of its only product Foundational 6-7 7. What is the amount of the difference between the variable costing and absorption costing net operating incomes (losses)? Difference of Variable Costing and Absorption Costing Net Operating Income (Losses) Variable costing net operating income (loss) Absorption costing net operating income (loss)

Explanation / Answer

Workings:

Note:

Under absorption costing fixed manufacturing overhead is proportionately allocated to goods sold and ending inventory. First a recovery rate is determined based on total fixed manufacturing overhead and then allocation is made based on the calculated rate.

It is as below:

Where as in variable costing total fixed manufacturing overhead is treated is period cost and expensed in full in the period incurred, hence the difference in net income is due to this difference in treatment.

Fixed selling expenses are treated as period costs under both methods and no difference occurs because of it in net income under both methods.

Particulars Amount Net operating income under variable costing $   -29,000 Add Fixed manufacturing overhead capitalized as part of closing inventory under absorption costing $     80,000 Net operating income under absorption costing $     51,000

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