Question

Steering Manufacturing produces snow shovels. The selling price per snow shovel is $29.00. There is no beginning inventory. Costs involved in production are: Direct material $5.00 Direct labor 4.00 Variable manufacturing overhead 4.00 Total variable manufacturing costs per unit $13.00 Fixed manufacturing overhead per year $181,170 In addition, the company has fixed selling and administrative costs of $172,400 per year. During the year, Steering produces 54,900 snow shovels and sells 49,560 snow shovels.

Calculate the difference in full costing net income and variable costing net income without preparing either income statement.

Difference in net income $___________

Answer 1

Answer

• #1: calculate unit product cost

	Product Cost
	Absorption Costing	Variable Costing
Direct Material	$5.00	$5.00
Direct Labor	$4.00	$4.00
Variable manufacturing overhead	$4.00	$4.00
Fixed manufacturing overhead	$3.30	$0.00
Total product cost	$16.30	$13.00

Variable Costing:

Product Cost under Variable costing includes direct material cost, direct labor cost, and variable manufacturing overhead only.

Fixed manufacturing overhead do not form part of the Product cost.

Absorption Costing:

Product Cost under Absorption costing includes direct material cost, direct labor cost, variable manufacturing overhead AND fixed manufacturing overheads.

>Selling, General and administrative expenses (BOTH Variable and Fixed) DO NOT FORM part of product cost.

• #2: Calculate Cost of Goods Sold

>Total expenses as per Full costing or Absorption costing = ($ 16.30 x 49560 unit sold) + $ 172400 fixed selling & admin = $ 980,228
>Total expenses as per Variable costing = ($ 13 x 49560 units sold) + $ 181170 fixed manufacturing overhead + $ 172400 fixed selling
= 644280 + 181170 + 172400
= $ 997,850

• Difference in Net Income = Difference in Total Expenses
  = $ 980228 - $ 997850
  = $ 17,622 Answer