Question

Great Bay Co. manufactures cordless telephones. During 2016, total costs associated with manufacturing 18,500 of the AB-2000 model (introduced this year) were as follows:

Raw materials	$	195,175
Direct labor		115,625
Variable manufacturing overhead		85,100
Fixed manufacturing overhead		114,700

(a.) Calculate the cost per phone under both direct (or variable) costing and absorption costing.
(b.) If 2,800 of these phones were in finished goods inventory at the end of 2016, by how much and in what direction (higher or lower) would 2016 operating income be different under direct (or variable) costing than under absorption costing?
(c.) Express the phone cost in a cost formula. What does this formula suggest the total cost of making an additional 1,600 phones would be?

Answer 1

Calculate cost per phone as below: Under variable costing: Raw materials Direct labor Variable manufacturing overhead Total variable cost Cost per phone under variable costing ($395,900 - 18,500) Amount ($) $195,175 $115,625 $85,100 $395,900 $21.40 Under absorption costing: Total variable cost Total fixed cost Total cost Cost per phone under absoption costing ($510,600 + 18,500) $395,900 $114,700 $510,600 $27.60 (b) Calculate the difference of income under variable costing and absorption costing as below: Total cost under marginal costing [($21.4 (18,500-2,800)) + $114,700)] Total cost under absorption costing [($27.6 x (18,500-2,800)] Difference of cost/ difference in income $450,680 $433,320 $17,360 (c) Cost of making additional 1,600 units (relevent cost) ($21.4 x 1,600] | $34,240