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Inventory Cost under Absorption and Variable Costing During the most recent year, Durham Inc
Inventory Cost under Absorption and Variable Costing
During the most recent year, Durham Inc. had the following data associated with the product it makes:
Units in beginning inventory Units produced 18,500 Units sold ($180 per unit) 15,000 Variable costs per unit: Direct materials $33 Direct labour $62 Variable overhead $29 Fixed costs: Fixed manufacturing overhead per unit produced $18 Fixed selling and administrative expense $180,000
Required:
1. How many units are in ending inventory?
3,500 units 2. Using absorption costing, calculate the per-unit product cost. What is the value of ending inventory? Unit product cost $ Value of ending inventory $
3. Using variable costing, calculate the per-unit product cost. What is the value of ending inventory?
Unit product cost $
Value of ending inventory
$
4. Calculate operating income using absorption costing.
$1
5. Calculate operating income using variable costing. $
Expert Solution
1) Computation of Units in Ending Inventory:
Units in Ending Inventory = (Units in Beginning Inventory + Units Produced) - Units Sold
= 18,500 - 15,000
= 3,500 units
2)
| Absorption Costing | |
| Direct Material | $33 |
| Direct Labor | $62 |
| Variable Overhead | $29 |
| Fixed manufacturing Overhead | $18 |
| Unit product cost | $142 |
| Value of Ending Inventory (3,500 units*$142) | $497,000 |
3)
| Variable Costing | |
| Direct Material | $33 |
| Direct Labor | $62 |
| Variable Overhead | $29 |
| Unit product cost | $124 |
| Value of Ending Inventory (3,500 units*$124) | $434,000 |
4)
| Income Statement under Absorption Costing | |
| Sales ($180 * 15,000) | $2,700,000.00 |
| Less: Cost of Goods Sold | |
| $142 * 15,000 | $2,130,000.00 |
| Gross Profit | $570,000.00 |
| Less: Fixed Selling and administrative Cost | $180,000.00 |
| Operating income | $390,000.00 |
5)
| Income Statement under Variable Costing | |
| Sales ($180 * 15,000) | 2700000 |
| Less: Variable Cost | |
| $124 * 15,000 | 1860000 |
| Contribution Margin | 840000 |
| Less: | |
| Fixed Manufacturing Cost | |
| $18 * $15,000 | 270000 |
| Fixed Selling and administrative Cost | $180,000 |
| Total Fixed Cost | $450,000 |
| Operating income | $390,000 |
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