Question

Fire Strom is a manufacturing of quality fireplace inserts for the residential home market. the following information pertains to fire strom's top of the line peninsula fireplace. Fire Strom had no beninning inventory for this item.

Production in units 3000

Sales in Units 2700

Unit selling price $1400

Fabrication hours used 45000 Hours

Direct labours used 3000 hours

Manufacuring costs :

             Direct materials $2100000

             Direct Labour $120000

              Variable manufacturing overheader $75000

             Fixed manufacturing over head $600000

       Non Manufacuring costs :

             Variable selling expenses $210000

            Fixed Selling expenses $250000

            Other fixed administrative Costs $700000

Question

1. Determine the unit product cost of a Firestrom Peninsula fireplace using variable costing

2. Determine the cost of goods sold using absorption costing

3. Determine the dollar difference in income(if any) using variable versus absorption costing and report which menthod will report higher income if appropriate.

Answer 1

1. Unit product cost: $765

Direct materials	2100000
Direct labor	120000
Variable manufacturing overheads	75000
Total variable product cost	2295000
÷ Number of units produced	3000
Unit product cost $	765

2. Cost of goods sold: $2605500

Variable cost of goods sold (2700 x $765)	2065500
Fixed manufacturing overheads ($600000 x 2700/3000)	540000
Cost of goods sold $	2605500

3. The difference in income using variable costing versus absorption costing is to the extent of the fixed manufacturing overheads deferred in the ending inventory under absorption costing.

Fixed manufacturing overheads deferred in ending inventory = $600000 x (3000 - 2700)/3000 = $600000 x 300/3000 = $60000

Thus, the dollar difference in income is $60000.

The absorption costing method will report higher income.