Company A produced 80,000 units and sold 75,000 units at a price of $20 per unit

Company A produced 80,000 units and sold 75,000 units at a price of $20 per unit.
Direct materials cost 200,000;  direct labor 320,000; overhead 160,000; fixed manufacturing overhead 400,000; administrative costs 60,000.

Calculate net income using full costing and calculate net income using variable costing.

The basic difference between absorption (full costing) and variable costing is the treatment of fixed manufacturing overhead. Absorption costing treats fixed overhead as a product cost while variable costing treats fixed overhead as a period cost.

Selling and administrative expenses are considered period costs under both absorption costing and variable costing.

Under absorption costing, fixed manufacturing overhead is a product cost and attaches to the product and is treated as a cost of inventory (work in process or finished goods) until the product is sold. Consequently, when all units produced are not sold, fixed manufacturing overhead gets "stuck" in inventory and it is not expensed until the units are sold in another period.

Selling price= $20
# of units sold= 75,000
Therefore, Sales= $1,500,000 =20x75000

Absorption costing:
# of units produced= 80,000

Direct material = $200,000
Direct labor= $320,000
Fixed manufacturing overhead= $400,000
$920,000

Cost of goods per unit= $11.50 =920000/80000

Variable costing:
# of units produced= 80,000

Direct material = $200,000
Direct labor= $320,000
$520,000

Variable cost of goods per unit= $6.50 =520000/80000

Net income under absorption costing:

Selling price= $20
# of units sold= 75,000
Therefore, Sales= $1,500,000 =20x75000
Cost of goods per unit= $11.50
Therefore, cost of goods sold= $862,500 =75000x11.5

Sales= $1,500,000
Less cost of goods sold= $862,500
Gross margin $637,500
Less
Administrative cost= $60,000
Overhead= $160,000 $220,000
Net Income $417,500

Net income under variable costing:

Selling price= $20
# of units sold= 75,000
Therefore, Sales= $1,500,000 =20x75000
Variable Cost of goods per unit= $6.50
Therefore, cost of goods sold= $487,500 =75000x6.5

Sales= $1,500,000
Less cost of goods sold= $487,500
Gross margin $1,012,500
Less
Administrative cost= $60,000
Fixed Manufacturing overhead= $400,000
Overhead= $160,000 $620,000
Net Income $392,500