Last year, Fabre Company produced 20,000 units and sold 18,000 units at a price of $12. Costs for last year were as follows:Direct materials $25,000Direct labor $35,000Variable factory overhead $12,000Fixed factory overhead $37,000Variable selling expense $9,000Fixed selling expense $7,500Fixed administrative expense $15,500Fixed factory overhead is applied based on expected production. Last year, Fabre expected to produce 20,000 units. Assuming that beginning inventory was zero, what would be the profit under variable costing and absorption costing?
Question
Last year, Fabre Company produced 20,000 units and sold 18,000 units at a price of 25,000Direct labor 12,000Fixed factory overhead 9,000Fixed selling expense 15,500Fixed factory overhead is applied based on expected production. Last year, Fabre expected to produce 20,000 units. Assuming that beginning inventory was zero, what would be the profit under variable costing and absorption costing?
Solution 1
To calculate the profit under variable costing and absorption costing, we first need to understand the difference between the two.
Variable costing includes all variable costs (direct materials, direct labor, variable factory overhead, and variable selling expense) in the product cost, while absorption costing includes both variable and fixed costs (all the costs mentioned above plus fixed factory overhead, fixed selling expense, and fixed administrative expense) in the product cost.
Step 1: Calculate the total cost per unit under both methods.
Variable Costing: Total Variable Cost = Direct materials + Direct labor + Variable factory overhead + Variable selling expense Total Variable Cost = 35,000 + 9,000 = $81,000
Variable Cost per Unit = Total Variable Cost / Total Units Produced Variable Cost per Unit = 4.05
Absorption Costing: Total Cost = Total Variable Cost + Fixed factory overhead + Fixed selling expense + Fixed administrative expense Total Cost = 37,000 + 15,500 = $141,000
Cost per Unit = Total Cost / Total Units Produced Cost per Unit = 7.05
Step 2: Calculate the total profit under both methods.
Variable Costing: Total Revenue = Units Sold * Selling Price Total Revenue = 18,000 * 216,000
Total Variable Cost = Units Sold * Variable Cost per Unit Total Variable Cost = 18,000 * 72,900
Total Fixed Cost = Fixed factory overhead + Fixed selling expense + Fixed administrative expense Total Fixed Cost = 7,500 + 60,000
Profit = Total Revenue - Total Variable Cost - Total Fixed Cost Profit = 72,900 - 83,100
Absorption Costing: Total Revenue = Units Sold * Selling Price Total Revenue = 18,000 * 216,000
Total Cost = Units Sold * Cost per Unit Total Cost = 18,000 * 126,900
Profit = Total Revenue - Total Cost Profit = 126,900 = $89,100
So, the profit under variable costing would be 89,100.
Solution 2
First, let's calculate the total costs under both variable and absorption costing.
Variable Costing: Under variable costing, only variable costs are considered. Fixed costs are treated as period costs and are deducted from revenue in the period they are incurred.
Variable costs include direct materials, direct labor, variable factory overhead, and variable selling expense.
Total Variable Costs = Direct materials + Direct labor + Variable factory overhead + Variable selling expense Total Variable Costs = 35,000 + 9,000 = $81,000
Absorption Costing: Under absorption costing, both variable and fixed manufacturing costs are considered. Fixed selling and administrative expenses are treated as period costs and are deducted from revenue in the period they are incurred.
Total Manufacturing Costs = Direct materials + Direct labor + Variable factory overhead + Fixed factory overhead Total Manufacturing Costs = 35,000 + 37,000 = $109,000
Next, let's calculate the profit under both costing methods.
Variable Costing: Revenue = Units sold * Price per unit = 18,000 units * 216,000 Total Costs = Total Variable Costs + Fixed factory overhead + Fixed selling expense + Fixed administrative expense Total Costs = 37,000 + 15,500 = 216,000 - 75,000
Absorption Costing: Revenue = Units sold * Price per unit = 18,000 units * 216,000 Cost of Goods Sold = Units sold * (Total Manufacturing Costs / Units produced) = 18,000 units * (98,100 Total Costs = Cost of Goods Sold + Fixed selling expense + Fixed administrative expense Total Costs = 7,500 + 121,100 Profit under Absorption Costing = Revenue - Total Costs = 121,100 = $94,900
So, the profit under variable costing would be 94,900.
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