Question

The following information pertains to SeaSpan Inc for a period: Selling price per unit Standard fixed manufacturing costs per unit Variable selling and administrative cost $41 $20 $4 per unit $16,000 Fixed selling and administrative costs Beginning inventories: Units Standard fixed manufacturing cost Standard variable manufacturing cost Units produced Units sold ? $40,000 $20,000 10,000 units 9,600 units a) Assume the unit standard costs data for the beginning and ending inventories remained constant during the period. What was the total standard cost of the ending inventory under absorption costing? b) Ignoring the effects of income taxes, what is your best estimate of the difference in retained carnings at the end of the period under absorption costing and variable costing?

Answer 1

Absorption Costing:

Absorption costing, sometimes called full absorption costing, is a managerial accounting method for capturing all costs associated with manufacturing a particular product. The direct and indirect costs, such as direct materials, direct labor, rent, and insurance, are accounted for using this method. Which means all the costs that are incurred / required to be incurred for manufacturing a product are allocated to the product.

Variable Costing

Variable costing is a concept used in managerial and cost accounting in which the fixed manufacturing overhead is excluded from the product-cost of production. The method is in contrast with absorption costing, in which the fixed manufacturing overhead is allocated to products produced.

a) Total standard cost for ending Inventory under absorption costing

Sr. No.	Particulars		Remarks
1	Standard Fixed Manufacturing costs	$    40,000
2	Standard Variable Manufacturing costs	$    20,000
3	Total Costs under Absorption Costing	$    60,000	(1 +2)
4	Total Inventory Produced	10,000
5	Per Unit Cost under Absorption costing	$             6	(3 / 5)
6	Total Inventory Sold	9,600
7	Ending Inventory	400	(4-6)
8	Total Standard Cost of Ending Inventory	$      2,400	(5 * 7)

b) Total Standard Cost of Inventory under Variable Costing

Sr. No.	Particulars		Remarks
1	Standard Variable Manufacturing costs	$    20,000
2	Total Costs under Variable Costing	$    20,000
3	Total Inventory Produced	10,000
4	Per Unit Cost under Variable costing	$             2	(2 / 4)
5	Total Inventory Sold	9,600
6	Ending Inventory	400	(3-5)
7	Total Variable Cost of Ending Inventory	$         800	(4 * 6)

Thus, the difference in retained earnings at the end of the period under absorption costing and variable costing is $ 1,600 ( 2,400 - 800) in the given case.

Note : The Variable & Fixed Selling Administrative costs are not considered as they are neither included in absorption costing method nor in the Variable costing method.