Question

Grainger Company produces only one product and sells that product for $100 per unit. Cost information for the product is as follows: Direct Material Direct Labor Variable Overhead $15 per Unit $25 per Unit $4 per Unit Fixed Overhead $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 $ 56 x ii. Variable Costing $ 52 x B. Which costing method provide higher net income? By how much? The absorption costing ✓ method provided more net income by

Answer 1

Absorption Costing Variable Costing S 160,800 $ 154,000 i B The absorption costing method provide more net income by $6,800 A. Working Notes: Grainger Company Absorption Costing Income Statement Sales Cost of Goods sold Gross Margin Selling and administrative Expenses Administrative Expenses $20,000 Variable selling Expenses $16.000 Income from Operations $ 400,000 $ 203,200 $ 196,800 $36.000 $ 160,800 Caluclation of Unit Product Cost Direct Materials Direct Lbor Variable overhead Fixed overhead Unit Product Cost Fixed overhead = $34.000/5000 = $7 Sales = 4000*$100 = $400,000 Cost of Goods Sold = 4,000*$51 = $203,200 Variable Selling Expenses = 4,000*$4 = $16,000

A Grainger Company Variable costing Income statement sales Less: Variable Cost of Goods sold Gross Contribution Margin Less: Variable selling Expenses Contribution Margin Less: fixed Costs Fixed Overhead $ Fixed Administrative Expense $ Total Fixed Cost Income from operations $ 400,000 $ 176,000 $ 224,000 $ 16,000 $ 208.000 34,000 20,000 $ 54,000 $ 154,000 15 Caluclation of Unit Product Cost Direct Material Direct Labor Variable overhead Sales = 38,000*$80 = $3,040,000 Variable Cost of Goods sold = 4.000*$44 = $176,000 Variable Selling Expense = 4000*4 = $16,000 B Diffrence in Net Income by Two methods = $160,800-$154,000 = $6,800