Question

Grainger Company produces only one product and sells that product for $110 per unit. Cost information for the product is as follows: Direct Material Direct Labor Variable Overhead Fixed Overhead $16 per Unit $25 per Unit $5 per Unit $34,000 Selling expenses are $4 per unit and are all variable. Administrative expenses of $20,000 are all fixed. Grainger produced 5,000 units; sold 4,000; and had no beginning inventory. A. Compute net income under i. Absorption Costing $ ii. Variable Costing $ B. Which costing method provide higher net income? By how much? The method provided more net income by $

Answer 1

Answer-A)-i)-

Grainger Company
Contribution Margin statement (Using absorption costing approach)
Particulars			Amount
			$
Sales (a)	4000 units*$110 per unit		440000
Less:- cost of goods sold (b)
Opening inventory
Add:- cost of goods manufatured		230000
Direct materials	5000 units*$16 per unit	80000
Direct labor	5000 units*$25 per unit	125000
Variable factory overhead	5000 units*$5 per unit	25000
Fixed overhaed		34000
Cost of goods available for sale		264000
Less:- Closing inventory	1000 units*$52.8 per unit	52800	211200
Gross contribution margin C= a-b			228800
Less:-Variable selling & administrative exp.	4000 units*$4 per unit		16000
Contribution margin			212800
Less:- Fixed costs
Selling & administrative exp.			20000
Net Income			192800

Explanation- Unit product cost under Absorption costing:-Direct materials + Direct Labor+ Variable manufacturing overhead + fixed manufacturing overhead

=$16+$25+$5+$6.8

= $52.8 per unit

Unit fixed manufacturing overhead= fixed manufacturing overhead/No. of units produced

=$34000/5000 units

=$6.8 per unit

ii)-

Grainger Company
Contribution Margin statement (Using variable costing approach)
Particulars			Amount
			$
Sales (a)	4000 units*$110 per unit		440000
Less:- Variable cost of goods sold (b)
Opening inventory
Add:- Variable cost of goods manufatured		230000
Direct materials	5000 units*$16 per unit	80000
Direct labor	5000 units*$25 per unit	125000
Variable factory overhead	5000 units*$5 per unit	25000
Variable cost of goods available for sale		230000
Less:- Closing inventory	1000 units*$46 per unit	46000	184000
Gross contribution margin C= a-b			256000
Less:-Variable selling & administrative exp.	4000 units*$4 per unit		16000
Contribution margin			240000
Less:- Fixed costs
Manufacturing overhead			34000
Selling & administrative exp.			20000
Net Income			186000

Explanation-Unit product cost under Variable costing:-Direct materials + Direct Labor+ Variable manufacturing overhead

=$16+$25+$5

= $46 per unit

B)- The absorption costing method provided more net income by $6800.