Full Absorption Costing Vs. Variable Costing
ACCY 302
- The following questions are based on Larue Corporation, which produces a single product it sells for $12 per unit. Of the 100,000 units produced, 80,000 were sold during year 1; all ending inventory was in finished goods inventory. Larue had no inventory at the beginning of the year.
DM…………$240,000DL…………$160,000Var. MOH…………$ 80,000
Fixed MOH...$240,000Var. M&A…$ 80,000Fixed M&A……….$128,000
- In presenting inventory on the balance sheet at December 31, what is the unit cost under full-absorption?
- In presenting inventory on a variable costing balance sheet what is the unit cost?
- What is the operating profit using variable costing?
- What is the operating profit using full-absorption costing?
- What is the value of ending inventory using full-absorption costing?
- What is the value of ending inventory under variable costing?
- Hathaway Company uses variable costing for internal management purposes and full-absorption costing for external reporting purposes. Thus, at the end of each year, financial information must be converted from variable costing to full-absorption costing for external reports. At the end of last year, management anticipated that sales would rise 20 percent this year. Therefore, production was increased from 20,000 units to 24,000 units. However, economic conditions kept sales volume at 20,000 units for both years. The following data pertain to the two years:
Last yearThis year
Selling price/unit$ 60$ 60
Sales (units) 20,000 20,000
Beginning invy. (units) 2,000 2,000
Production (units) 20,000 24,000
Ending invy. (units) 2,000 6,000
Underapplied VOH$10,000$ 8,000
Variable cost per unit for both years was composed of the following:
Labor…………………$15
Materials……………. 9
Variable OH………… 6
$30
Estimated and actual fixed costs for each year follow:
Production………..$180,000
S&A……………… 200,000
$380,000
The overhead rate under full-absorption costing is based on estimated volume of 30,000 units per year. Under- or overapplied overhead is debited or credited to Cost of Goods Sold.
REQUIRED: Use the preceding data to complete the following:
- Present the income statement based on variable costing for this year.
- Present the income statement based on full-absorption costing for this year.
Lockard Company’s vice president for sales received the following income statement for November. The statement has been prepared using variable costing, which the firm has just adopted for internal reporting purposes.
Lockard Company
Income Statement
For the month of November
(in thousands)
Sales Revenue$2,400
Less: variable CGS 1,200
Contribution margin$1,200
Less: fixed manufacturing costs 600
Gross margin$ 600
Less: fixed nonmanfg. Costs 400
Operating income$ 200
The controller attached the following notes to the statements.
-The unit sales price for November averaged $24.
-The unit manufacturing costs for the month follow:
Variable costs$12
Fixed cost 4
Total cost$16
The unit rate for fixed manufacturing costs is a predetermined rate based on a normal monthly production of 150,000 units. Both actual and estimated fixed overhead was $600,000.
-Production for November was 45,000 units in excess of sales.
-The inventory at November 30 consisted of 45,000 units.
REQUIRED: The vice president for sales is not comfortable with the variable cost basis and wonders what the operating profit would have been under the full-absorption cost basis applying fixed overhead using a predetermined rate.
1)Present the November income statement on a full-absorption cost basis.
2)Reconcile and explain the difference between the variable costing and the full-absorption costing operating profit figures.