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Product Cost and Net Income - Variable Vs. Absorption

Farron Company, which has only one product, has provided the following data concerning its most recent month of operations:

Selling price $92

Units in beginning inventory 0
Units produced 8,700
Units sold 8,300
Units in ending inventory 400

Variable costs per unit:
Direct materials $13
Direct labor 55
Variable manufacturing overhead 1
Variable selling and administrative 5

Fixed costs:
Fixed manufacturing overhead $130,500
Fixed selling and administrative 8,300

What is the unit product cost for the month under variable costing?
A) $69
B) $84
C) $89
D) $74

What is the unit product cost for the month under absorption costing?
A) $74
B) $89
C) $69
D) $84

What is the net income for the month under variable costing?
A) $10,600
B) ($17,000)
C) $16,600
D) $6,000

What is the net income for the month under absorption costing?
A) ($17,000)
B) $16,600
C) $6,000
D) $10,600

Solution Preview

The principal difference between variable costing and absorption costing is that, under variable costing, all variable costs are product (i.e., inventory) costs and all fixed costs are period costs (i.e., operating expenses).

What is the unit product cost for the month under variable costing?
A) $69
B) $84
C) $89
D) $74

The total unit product cost for the month under variable costing would be the total variable costs per unit:

Variable costs per unit:
Direct materials $13
Direct labor 55
Variable manufacturing overhead 1
Variable selling and administrative 5
Total variable costs per unit $74 ($13+$55+$1+$5) ANSWER D

What is the unit product cost for the month under absorption costing?
A) $74
B) $89
C) $69
D) $84

The total unit product cost under absorption costing consists of all costs which ...

Solution Summary

This solution explains and illustrates how to compute the unit product cost and net income under both variable and absorption costing then production exceeds sales.

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