Question

Preparing variable and absorption costing income statements

This problem continues the Piedmont Computer Problem situation from Chapter 20. Piedmont Computer Company manufactures personal computers and tablets. Based on the latest information from the cost accountant, using the current sales mix, the weighted-average sales price per unit is \(750 and the weighed-average variable cost per unit is \)450. The company does not expect the sales mix to vary for the next year. Assume the beginning balance in Finished Goods Inventory is \(0. Additional data for the first month of 2020:

January 2020

Unitsproduced and sold: Sales 945 units Production 1,000 units Variable manufacturing cost per unit \) 450 Sales commission cost per unit 25 Total fixed manufacturing overhead 93,600 Total fixed selling and administrative costs 62,400

Requirements

1. Compute the product cost per unit produced under absorption costing and under variable costing.

2. Prepare income statements for January 2020 using: a. absorption costing. b. variable costing.

3. Is operating income higher under absorption costing or variable costing in January? What causes the difference?

Short answer

1. The product cost per unit under absorption and variable costing are $543.6 and $450 respectively.
2. The operating income under absorption and variable costingare $109,023 and $103,875 respectively.
3. Yes, operating income higher under absorption costing than variable costing because of difference in method of allocation of fixed cost.

Step-by-step solution

Calculation of product cost per unit

Particulars	Absorption Costing	Variable Costing
Variable manufacturing cost per unit	$450	$450
Fixed manufacturing overhead per unit (93,600/1,000)	$93.6	-
Product cost per unit	$543.6	$450

Income statement as per absorption costing

Particulars	Amount
Net sales revenue ($750x945)	$708,750
Less: Cost of goods sold ($543.6x945)	$513,702
Gross profit	$195,048
Less: Variable selling and administrative costs ($25x945)	$23,625
Less: Fixed selling and administrative costs	$62,400
Operating income	$109,023

Income statement as per variable costing

Particulars	Amount
Net sales revenue ($750x945)	$708,750
Less: Variable cost ($450x945)	$425,250
Less: Variable selling and administrative expenses ($25x945)	$23,625
Contribution Margin	$259,875
Less: Fixed manufacturing costs	$93,600
Less: Fixed selling and administrative costs	$62,400
Operating income	$103,875

Profitability Analysis

The operating income under absorption costing is higher than that in variable costing because under absorption costing manufacturing fixed overheads are not fully absorbed in the current year due to short sales