[praying_for_75]

Beginning inventory- 30,000 units

Production- 120,000 units

Available- 150,000 units

Sales- 110,000 units

Ending inventory- 40,000 units

The following is on a per unit basis:

Selling price- $5.00

Var.Manufacturing costs- 1.00

Var. selling costs- 2.00

Fixed Manuf. costs ( based on 100,000 units)- 0.25

Fixed selling costs (based on 100,000 units)- 0.65

Total Fixed costs remain unchanged within the relevant range of 25,000 units to total capacity of 160,000.

Question- If variances are charged to COGS, what is the NI under absorption costing?

Answer- $132,500

Explanation:

Step 1- Increase in inventory- 10,000 units * $0.25 fixed manufacturing costs per unit=$2500 fixed cost trannsferred to

the next period.

Step 2- NI under absorption costing is 130,000+ 2,500= 132,500

What I don’t understand is step 2…What is 130,000 and why is it added to 2,500?

Please help! Thanks

[sacredtheory]

130,000 is the original net income

110,000 units x $2 = $220,000 ($2 is the selling price per unit minus variable costs per unit)

Total fixed costs are $90,000 (100,000 + .25, and 100,000 + .65)

–> total fixed costs will remain unchanged since you're still within the relevant range

$220,000 – 90,000 = $130,000

BEC: Passed
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Jared

[praying_for_75]

Okay, I understand your calculations…but in the first place why are you calculating the net income using the contribution approach..I have done some calculations and got the same answer using the absorption approach..So what do you recommend?

Am i missing out something or calculating in a wrong way? Please advise.

Sales (110,000*5) = 550,000

– COGS (100,000* 0.25 + 110,000*1)= 135,000

Gross margin = 415,000

– Operating expenses ( 110,000*2 + 100,000* 0.65)= 285,000

Net Income= 130,000

[Anonymous]

Praying – I haven't fully understand the concept yet, but I think this has to do with mamufactured units (120,000) > sale units (110,000). Therefore, the fixed cost of 0.25 needs to be allocated to the ending balance instead of sale cost. 10,000 * 0.25 = 2,500 needs to subtracted from the total manufactured cost of $25,000. So, the total fixed manufactured cost is $22,500.

Sale: 550,000

Var. Cost (330,000)

fix Manu OH (22,500)

fix selling Cost (65,000)

= $132,500

Someone please let me know if my explaination is correct.

[Author]

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