[Young Shil]

Pl help in understanding the following (Wiley Test Bank)

Produced 100000 units and sold 80000 units

Manufacturing Costs : Fixed : $ 180,000

Variable : $ 160,000

Selling Expenses : Fixed : $ 90,000

Variable : $ 40,000

By using Variable costing in stead of Absorption Costing how much net income will differ.

The Answer is $ 36000 considering 20% of Fixed Manufacturing Costs. Why other Selling portion of the FC not considered.

Class of 2012 - 13.

[IfThereIsaGod]

Because selling and Admin costs are period costs either way, they just are accounted for differently. They never are capitalized into the unit cost. I think this is right, if not please someone correct me.

AUD----92 5/31/12
FAR----92 7/3/12
RED----85 8/3/12
BEC----?? 8/29/12

[Anonymous]

This is the way I understand this problem, if I'm wrong, someone PLEASE correct me!

Under Variable costing you only count the Variable Mfg Costs (160,000) in Cost of Goods Sold. Under Absorption Costing you would count count the Fixed Mfg Costs (180,000), Variable Mfg Costs (160,000), and Variable Selling Expense (40,000), when you compute Cost of Goods Sold. So … if you made 100,000 units but only sold 80,000 units, then assuming a totally made up sales price of $10/unit, you would have income statements that look like these:

Absorption Costing

Sales 800,000

COGS (304,000)

Gross Margin 496,000

Expenses (90,000)

Net Income 460,000

Variable Costing

Sales 800,000

COGS (160,000)

Gross Margin 640,000

Expenses (270,000)

Net Income 370,000

The difference between the two is $36,000. If you had a beginning Inventory Balance of $0, then at the end of the year you would have a debit balance of $36,000.

I THINK this is right. Seriously, if I am wrong, someone please find me!!!

[mmcgrad1]

EDIT: Sorry, I'm tired, the calculation is correct but I wrote what I wanted to say incorrectly. What I meant to say was:

Under absorption costing fixed costs are not included in COGS unless the units are sold. In variable costing, all fixed costs are immediately expensed.

FC = 180,000

Units Produced = 100,000

FC/U = 1.8

Units not sold= 100,000-80,000=20,000

Difference in Net Income = 20,000*1.8=36,000

In variable costing, NI is 36,000 less than absorption costing.

NIU CPA Review Correspondence is awesome!

I passed all four sections on the first attempt

[Anonymous]

@mmcgrad1 – Yeah, that's a lot easier than what I did. UGH!!!

[mmcgrad1]

Please check my edit. I'm tired and my brain was malfunctioning in my explanation. I was rereading what I wrote and I explained the difference incorrectly.

NIU CPA Review Correspondence is awesome!

I passed all four sections on the first attempt

[Roxwella]

This is what I have memorized for tomorrow on this type of question:

Selling/advertising costs are not a factor in “absorption vs variable” problems, they are there to distract and confuse. Those are period costs, and are not applied to products. Period costs are not deducted until calculating operating income (net sales – product costs = gross margin – period costs = operating income).

Next, these problems always revolve around the difference between production and sales because:

Absorption costing- allocates product cost as inventory until it is sold

Variable- Expenses when produced.

Finally, a nugget I enjoy, and have found useful on a number of sample questions I have encountered (instead of trying to re-figure from each problem set)

When-

Absorption = Variable : Production = Sales

Absorption > Variable : Production > Sales

Absorption < Variable : Production < Sales

[Author]

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