What is the basic difference between absorption costing
Question 1:
Required:
- What is the basic difference between absorption costing and variable costing?
Question 2:
Refined Elegance Corp. makes a desk specially designed for personal computers. The desk sells for $200.
Data for last year’s operations follow:
Units in beginning inventory | 0 |
Units produced | 10,000 |
Units sold | 9,000 |
Units in ending inventory | 1,000 |
Variable costs per unit: | |
Direct materials | $ 40 |
Direct labour | 35 |
Variable manufacturing overhead | 10 |
Variable selling and administrative | 25 |
Total variable cost per unit | $ 110 |
Fixed costs: | |
Fixed manufacturing overhead | $300,000 |
Fixed selling and administrative | 450,000 |
Total fixed costs | $750,000 |
Required:
- Assume that the company uses variable costing. Compute the unit product cost for one computer desk.
- Assume that the company uses variable costing. Prepare a contribution format income statement for the year.
- What is the company’s break-even point in terms of units sold?
Question 3:
Refer to the data in the previous question for Refined Elegance Corp. Assume in this exercise that the company uses absorption costing.
Required:
- Compute the unit product cost for one computer desk.
- Prepare an income statement for the year.
Question 4:
The following information pertains to Death Star Corporation for a period:
Selling price per unit | $41 |
Standard fixed manufacturing costs per unit | $20 |
Variable selling and administrative costs per unit | $4 |
Fixed selling and administrative cost per unit | $16,000 |
Beginning inventories: | |
Units | ? |
Standard fixed manufacturing cost | $40,000 |
Standard variable manufacturing cost | $20,000 |
Units produced | 10,000 |
Units sold | 9,600 |
Required:
- Assume the unit standard costs data for the beginning and ending inventories remained constant during the period. What was the total standard cost of the ending inventory under absorption costing?
Question 5:
Algonquin Outfitters Corporation, which has only one product, has provided the following data concerning its most recent month of operations:
Selling price | $111 |
Units in beginning inventory | 400 |
Units produced | 8,800 |
Units sold | 8,900 |
Variable costs per unit: | |
Direct materials | $34 |
Direct labour | $37 |
Variable manufacturing overhead | $3 |
Variable selling and administrative | $9 |
Fixed costs: | |
Fixed manufacturing overhead | $61,600 |
Fixed selling and administrative | $169,100 |
The company produces the same number of units every month, although the sales in units vary from month to month. The company's variable costs per unit and total fixed costs have been constant from month to month.
Required:
- Compute the total Contribution Margin.
- Compute the Operating Income under Variable Costing.
- Prepare a reconciliation from your Variable Costing Operating Income to compute Operating Income under absorption costing.
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Solution: What is the basic difference between absorption costing