Question

The following information pertains to SeaSpan Inc for a period: 11 Harja $41 S20 54 S16,000 Selling price per unit Standard fixed manufacturing costs per unit Variable selling and administrative cost per unit Fixed selling and administrative costs Beginning inventories: Units Standard fixed manufacturing cost Standard variable manufacturing cost Units produced Units sold 2 S40,000 $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 earnings at the end of the period under absorption costing and variable costing?

Answer 1

a) Standard cost of ending inventory - Absorption costing Ending inventory units 2,400 a Standard cost per unit $30b Standard cost of ending inventory $72,000 a*b b) Difference in Retained earnings at the end of the period $8,000 The difference is equal to fixed manufacturing overheads multiplied by difference in opening and closing inventory Reconciliation of Difference in Retained Earnings Net Income as per Absorption costing Less: Fixed manufacturing overhead in Ending inventory $51,200 see working below -$48,000 (2,400*20) $3,200 $40,000 (2,000*20) $43,200 Add: Fixed manufacturing overhead released in Beginning Net Income as per Variable costing Working notes: Beginning inventory Standard fixed manufacturing cost Standard fixed manufacturing cost per unit Beginning inventory in units $40,000 a $20b 2,000 a/b Ending inventory (units) Beginning Inventory Production Total units available Sales Closing Inventory units Units 2,000 10,000 12,000 9,600 2,400 Product cost-Absorption costing Standard fixed manufacturing cost Standard variable manufacturing cost Total cost of beginning inventory Beginning inventory in units Standard cost per unit $40,000 $20,000 $60,000 2,000 Units $30 $393,600 (9,600*$41) Variable Costing income statement Sales Variable cost Manufacturing cost (9,600*10) $96,000 Selling and administrative (9,600* $4) $38,400 Contribution margin Fixed costs Manufacturing costs (10,000*$20) $200,000 Selling and administrative expense $16,000 Net Income $134,400 $259,200 $216,000 $43,200 $393,600|(9,600*$41) $288,000 (9,600*$30) $105,600 Absorption Costing Income Statement Sales Cost of goods sold Gross Profit Operating expenses Variable selling and administrative expenses $38,400 Fixed selling and administrative expense $16,000 Net Income $54,400 $51,200