Question

COMPARE FULL COSTING AND VARIABLE COSTING SYSTEM 1.The company XYZ" uses the weighted-average-cost method. It show the following data: Concepts Beginning finished good inventoryC Beginning work in progress inventory Manufacturing variable costs Manufacturing fixed costs Ending work in progress inventory C Units Manufactured Units sold and revenues Units Total amount 50 54,975 15,000 135.000 60,000 10,000 125 165 360,000 (*) These amounts are calculated under full (absorption) costing system. It is estimated that 60% of these are variable costs The sales commissions and other marketing costs variables are 10% of sales. Fixed commercial costs are 22,000 and fixed administration costs are 16,000. Required Using the Full (Absorption) Costing System 1.- Calculate cost of goods manufactured and the cost of goods sold. 2.- Prepare an income statement and calculate the operating income Using the Variable Costing System 2.- Prepare an income statement and calculate the operating income. Compare both income statement and ending finished good inventories and comment the results 1.- Calculate cost of goods manufactured and the cost of goods sold.

Answer 1

1)	COST OF GOODS MANUFCTURED AND COST OF GOODS SOLD
	Beginning WIP inventory		15000
	Cost of goods manufactured:
	Manufacturing variable costs	135000
	Manufacturing fixed costs	60000
	Manufacturing costs for the year		195000
	Total manufacturing costs		210000
	Less: Ending WIP inventory		10000
	Cost of goods manufactured (125)		200000
	Beginning finished goods inventory (50 Units)		54975
	Cost of goods available for sale		254975
	Less: Ending finished goods inventory (10 Units)
	(254975*10/175)		14570
	Cost of goods sold		240405
2)	INCOME STATEMENT-ABSORPTION COSTING
	Sales (165 Units)		360000
	Cost of goods sold		240405
	Gross profit		119595
	Operating expenses:
	Variable sales commission and other marketing costs	36000
	Fixed commercial costs	22000
	Fixed administration costs	16000
	Total operating expenses		74000
	Net operating income		45595
1)	COST OF GOODS MANUFCTURED AND COST OF GOODS SOLD
	Beginning WIP inventory (15000*60%)		9000
	Manufacturing variable costs incurred during the year		135000
	Total manufacturing costs		144000
	Less: Ending WIP inventory (10000*60%)		6000
	Cost of goods manufactured (125)		138000
	Beginning finished goods inventory (50 Units) (54975*60%)		32985
	Cost of goods available for sale		170985
	Less: Ending finished goods inventory (10 Units)
	(170985*10/175)		9771
	Variable manfacturing cost of goods sold		161214
	Sales commissions and other marketing costs		36000
	Variable cost of goods sold		197214
2)	INCOME STATEMENT-VARIABLE COSTING
	Sales (165 Units)		360000
	Variable cost of goods sold		197214
	Contribution margin		162786
	Fixed expenses:
	Manufacturing	60000
	Fixed commercial costs	22000
	Fixed administration costs	16000
	Total fixed expenses		98000
	Net operating income		64786
	COMPARISON:	Ending FG Inventory	Net Operating Income
	Absorption costing	14570	45595
	Variable costing	9771	64786
	Difference	4799	-19191
	The net operating income under the absorption costing income is less than the
	net operating income under the variable costing income, due to carry over of
	fixed costs from the earlier period, which were included in the beginning inventory of WIP & FG.
	In addition to the difference in value of the ending inventory, the value of the
	beginning stock of WIP and finished goods and the difference in the value of the
	ending WIP would also account for the difference in NOI.
		Absorption Costing	Variable Costing
	Ending WIP	10000	6000
	Beginning WIP	15000	9000
	Beginning FG	54975	32985
	Difference in beginning stocks	69975	41985
	Difference in ending WIP	4000
	Difference in ending FG	4799
	Difference in ending stocks	8799
	Difference in beginning stocks	27990
	Net difference	19191
	This is equal to the difference in net income.