Question

Question 2 (22 marks) Silver Industries Limited produces and sells sweaters under the "Silver" label. The company has provided the following data: Beginning inventory 0 Units produced 160,000 Units sold 148,500 Net operating income under variable costing is $2,800,000. Fixed manufacturing overhead incurred for the above production process totaled $864,000. Required: 1, Compute the units of ending inventory (5 marks). 2. Compute the manufacturing overhead per unit absorbed in the ending inventory. (5 marks) 3. Use vertical 3 rows schedule to explain the variances between the absorption costing and variable cost operating income figures. (12 marks)

Answer 1

Solution 1:

units in ending inventory = Units in beginning inventory + units produced - units in ending inventory

= 0 + 160000 - 148500 = 11500

Solution 2:

Manufacturing overhead per unit = $864,000 / 160000 = $5.40 per unit

Solution 3:

Reconciliation of Net Operating income under absorption costing & Variable Costing
Particulars	Amount
Net Operating Income - Variable Costing	$2,800,000.00
Add : Fixed manufacturing overhead deferred in inventory ($5.40*11500)	$62,100.00
Less: Fixed manufacturing overhead released in inventory	$0.00
Net Operating Income - Absorption Costing	$2,862,100.00