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Required information [The following information applies to the questions displayed below] Diego Company manufactures one product that is sold for $76 per unit in two geographic regions—the East and West regions
Required information [The following information applies to the questions displayed below]
Diego Company manufactures one product that is sold for $76 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 58,000 units and sold 54,000 units.
Variable costs per unit: Manufacturing: Direct materials 23 Direct labor 15 Variable manufacturing overhead 3 Variable selling and administrative 3 Fixed costs per year: Fixed manufacturing overhead $1,160,000 Fixed selling and administrative expense $ 640,000
The company sold 40,000 units in the East region and 14,000 units in the West region. It determined that $320,000 of its fixed selling and administrative expense is traceable to the West region, $270,000 is traceable to the East region, and the remaining $50,000 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.
7. What is the amount of the difference between the variable costing and absorption costing net operating incomes (losses)?
Variable costing net operating income (loss) Add: Fixed manufacturing overhead cost deferred in inventory under absorption costing Absorption costing net operating income (loss)
?
$ (72,000)
Expert Solution
Variable Costing:
| Year 1 | |
| Direct Material | 23 |
| Direct Labor | 15 |
| Variable Manufacturing Overhead | 3 |
| Unit Cost | 41 |
| Sales (54,000*$76) | 4104000 |
| Variable Expenses: | |
| Cost of Goods Sold | |
| Opening Inventory | - |
| Add: Cost of Goods Manufactured (58,000*$41) | 2378000 |
| Less: Closing Inventory (4,000*$41) | 164000 |
| Cost of Goods Sold | 2214000 |
| Variable Selling and Administrative Expenses @ $3 | 162000 |
| Total Variable Expenses | 2376000 |
| Contribution Margin | 1728000 |
| Fixed Expenses | |
| Fixed Manufacturing Overhead | 1160000 |
| Fixed Selling and Adm. Expenses | 640000 |
| Total Fixed expenses | 1800000 |
| Net operating income | -72000 |
Absorption Costing:
| Year 1 | |
| Direct Material | 23 |
| Direct Labor | 15 |
| Variable Manufacturing Overhead | 3 |
| Fixed Manufacturing overhead ($1,160,000/58,000) | 20 |
| Unit Cost | 61 |
| Sales | 4104000 |
| Variable Expenses | |
| Cost of Goods Sold | |
| Opening Inventory | - |
| Add: Cost of Goods Manufactured | 3538000 |
| Less: Closing Inventory | 244000 |
| Cost of Goods Sold | 3294000 |
| Variable Selling and Administrative Expenses @ $3 | 162000 |
| Total Variable Expenses | 3456000 |
| Contribution Margin | 648000 |
| Fixed Expenses | |
| Fixed Selling and Adm. Expenses | 640000 |
| Total Fixed expenses | 640000 |
| Net operating income | 8000 |
Reconciliation between variable and absorption costing:
| Net Loss under Variable costing | -72,000 |
| Add: Fixed manufacturing overhead differed in Closing Inventory | 80,000 |
| (4,000 Units * $20) | |
| Profit under Absorption costing | 8,000 |
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