Question

Variable and Absorption Costing
Chandler Company sells its product for $120 per unit. Variable manufacturing costs per unit are $49, and fixed manufacturing costs at the normal operating level of 12,000 units are $240,000. Variable selling expenses are $21 per unit sold. Fixed administrative expenses total $104,000. Chandler had no beginning inventory in 2016. During 2016, the company produced 12,000 units and sold 9,000. Would net income for Chandler Company in 2016 be higher if calculated using variable costing or using absorption costing?

Calculate reported income using each method.
Do not use negative signs with any answers.

Absorption Costing Income Statement
Sales				Answer
Cost of Goods Sold:
Beginning Inventory			Answer
Variable Costs			Answer
Fixed Costs			Answer
Less: Ending Inventory			Answer
Cost of Goods Sold				Answer
AnswerContribution marginGross profitLess: Ending inventoryManufacturing costSelling expenseVariable selling expense				Answer
AnswerContribution marginGross profitLess: Ending inventoryManufacturing costSelling expenseVariable selling expense				Answer
Administrative expense				Answer
Net Income				Answer

Variable Costing Income Statement
Sales				Answer
Cost of Goods Sold:
Beginning Inventory			Answer
Variable Costs			Answer
AnswerContribution marginGross profitLess: Ending inventoryManufacturing costSelling expenseVariable selling expense			Answer
Variable cost of goods sold				Answer
AnswerContribution marginGross profitLess: Ending inventoryManufacturing costSelling expenseVariable selling expense				Answer
AnswerContribution marginGross profitLess: Ending inventoryManufacturing costSelling expenseVariable selling expense				Answer
Fixed costs:
AnswerContribution marginGross profitLess: Ending inventoryManufacturing costSelling expenseVariable selling expense			Answer
Administrative Expense			Answer
Total Fixed Cost				Answer
Net Income				Answer

Answer 1

Absorption Costing Income Statement
Sales                                        [Units sold x Selling price per unit = 9,000 units x $120]		$1,080,000
Cost of goods Sold
Beginning inventory	$0
Variable costs                       [Units sold x Variable manufacturing cost per unit = 9,000 units x $49]	$441,000
Fixed costs	$240,000
Less: Ending Inventory           [Refer working note 1]	$207,000
Cost of goods sold		$474,000
Gross Profit                               [Sales - Cost of goods sold = $1,080,000 - $474,000]		$606,000
Salling Expense                          [Units sold x Selling expense per unit = 9,000 units x $21]		$189,000
Administrative Expense:		$104,000
Net Income                              [$606,000 - $189,000 - $104,000]		$313,000

.

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Variable Costing Income Statement
Sales                                        [Units sold x Selling price per unit = 9,000 units x $120]		$1,080,000
Cost of goods Sold
Beginning inventory	$0
Variable costs                       [Units sold x Variable manufacturing cost per unit = 9,000 units x $49]	$441,000
Less: Ending Inventory          [Refer working note 2]	$147,000
Variable cost of goods sold       [$0 + $441,000 - $147,000]		$294,000
Variable selling Expense          [Units sold x Selling expense per unit = 9,000 units x $21]		$189,000
Contribution margin                    [Sales - Variable cost of goods sold = $1,080,000 - $294,000 - $189,000]		$597,000
Fixed costs
Manufacturing cost	$240,000
Administrative Expense	$104,000
Total fixed cost                   [$240,000 + $104,000]		$344,000
Net Income                           [$597,000 - $344,000]		$253,000

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Working note 1 - Computation of value of ending inventory under absorption costing
Variable manufacturing cost per unit	$49
Fixed manufacturing cost per unit                   [Total Fixed manufacturing cost / Units produced = 240,000 / 12,000 units]	$20
Cost per unit                                                     [$49 + $20]	$69
Number of units in ending inventory               [Production - Sales = 12,000 units - 9,000 units]	3,000
Value of ending inventory                              [Ending inventoy x Cost per unit = 3,000 units x $69]	$207,000

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Working note 2 - Computation of value of ending inventory under variable costing
Cost per unit = Variable manufacturing cost per unit	$49
Number of units in ending inventory               [Production - Sales = 12,000 units - 9,000 units]	3,000
Value of ending inventory                              [Ending inventoy x Cost per unit = 3,000 units x $49]	$147,000