Question

Diego Company manufactures one product that is sold for $80 per unit in two geographic regions—the East and West regions. The following information pertains to the company’s first year of operations in which it produced 51,000 units and sold 47,000 units.

  

Variable costs per unit:
Manufacturing:
Direct materials	$	30
Direct labor	$	18
Variable manufacturing overhead	$	2
Variable selling and administrative	$	3
Fixed costs per year:
Fixed manufacturing overhead	$	816,000
Fixed selling and administrative expenses	$	480,000

  

The company sold 34,000 units in the East region and 13,000 units in the West region. It determined that $250,000 of its fixed selling and administrative expenses is traceable to the West region, $200,000 is traceable to the East region, and the remaining $30,000 is a common fixed cost. The company will continue to incur the total amount of its fixed manufacturing overhead costs as long as it continues to produce any amount of its only product.

What is the amount of the difference between the variable costing and absorption costing net operating incomes (losses)?

Variable costing net operating income (loss)

Add: Fixed manufacturing overhead cost deferred in inventory under absorption costing

Add: Fixed manufacturing overhead cost released from inventory under absorption costing

Deduct: Fixed manufacturing overhead cost deferred in inventory under absorption costing

Deduct: Fixed manufacturing overhead cost released from inventory under absorption costing

Absorption costing net operating income (loss)

Answer 1

What is the amount of the difference between the variable costing and absorption costing net operating incomes (losses)?  

Variable costing net operating income (loss)	-27000
Add: Fixed manufacturing overhead cost deferred in inventory under absorption costing (816000/51000*4000)	64000
Absorption costing net operating income (loss)	37000