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# Absorbtion Costing vs. Variable Costing

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What exactly is absorption costing vs. variable costing?
In your opinion, describe whether you think overproducing is an ethical practice and why or why not. Include discussion of which stakeholders might react, and how they would react if they knew about this practice.
Using the following data, calculate the difference between reported income and unit costs under absorption and variable costing by answering these questions:
- How many units of production were produced? shipped? left in inventory?
- What is this firm's predetermined fixed overhead rate?
- How much of the firms fixed costs stayed in inventory under variable costing? under absorption costing?
- Calculate the unit cost using variable costing. using absorption costing.
- Based on this firm's predetermined fixed overhead rate, how much of the firms fixed costs ended up on the year's COGS and income statement under variable costing? under absorption costing?
Under which method (variable or absorption costing), will reported profits be higher? Explain why.
Data

Budgeted and Actual fixed costs
\$2,000,000

Budgeted unit volume to be produced
20,000

Budgeted unit volume sold
20,000

Actual variable costs
\$600,000

Actual unit volume sold
20,000

Actual units produced
21,000

Beginning of year inventory
0

End of year inventory
?

What exactly is absorption costing vs. variable costing?

#### Solution Summary

This solution provides guidance in comparing absorption and variable costing in the attached Excel file for this assignment.

\$2.19

## Absorption Costing Vs. Variable Costing

The Johnson Company produces a very popular product. The company had the following results for its the last two years:

Year 2014
Year 2015

Sales
2014: \$600,000
2015: \$600,000

Cost of goods sold
2014: \$400,000
2015: \$340,000

2014: \$150,000
2015: \$150,000

Gross margin
2014: \$200,000
2015: \$260,000

Net operating income (loss)
2014: \$50,000
2015: \$110,000