Vernon Inc. manufactures and sells one product. Sales and production information is contained...

Question:

Vernon Inc. manufactures and sells one product. Sales and production information is contained below.

Selling price per unit $50
Variable manufacturing costs per unit produced (DM, DL, and variable MOH) $24
Variable operating expenses per unit sold $5
Fixed manufacturing overhead (MOH) in total for the year $135,000
Fixed operating expenses in total for the year $55,000
Units produced during the year 15,000
Units sold during the year 13,000

a) Prepare the income statement using variable costing.

b) Prepare the income statement using absorption costing.

c) Explain the difference in operating income between the two methods.

Variable Costing:

Variable costing is usually presented using the the contribution margin income statement. All variable costs, both product and period costs are added to be sued in computing for the contribution margin. This costing method treats all fixed costs as expense at the time of production.

Answer and Explanation:

a) Prepare the income statement using variable costing.

Sales 650,000
Variable Manufacturing Cost -312,000
Variable Operating Expenses -65,000
Contribution Margin 273,000
Fixed Manufacturing Overhead -135,000
Fixed Operating Expenses -55,000
Net Income 83,000


b) Prepare the income statement using absorption costing.

Sales 650,000
Variable Manufacturing Cost -312,000
Fixed Manufacturing Overhead -117,000
Gross Margin 221,000
Variable Operating Expenses -65,000
Fixed Operating Expenses -55,000
Net Income 101,000


c) Explain the difference in operating income between the two methods.

Based on the computations, variable costing showed net income of 83,000 while absorption costing is 101,000. The 18,000 difference can be attributed to the fixed manufacturing cost of the 2,000 remained as ending inventories. This is because variable costing treats all fixed manufacturing cost at the time of production, regardless of these units are sold or remained in the inventory. Whereas, in absorption costing, fixed cost allocated a=only pertains to the cost of the sold units. To check, this can be computed by dividing 135,000 to 15,000 to get the 9 fixed manufacturing cost per unit, then, it will be multiplies to the 2, 000 units remained in the inventory.


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Variable Costing: Method, Formula & Advantages

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