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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?

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Solution Summary

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

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See Also This Related BrainMass Solution

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

Administration Costs:
2014: $150,000
2015: $150,000

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

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

Additional information about the company is as follows:

In Year 2014, the company produced and sold 20,000 units of their product product. In 2015, the company also sold 20,000 units, but increased production to 25,000 units. The company' variable production cost is $6 per unit and its fixed manufacturing overhead cost is $300,000 per year. Fixed manufacturing overhead costs are applied to the product on the basis of each year's unit production. Variable selling and administrative expenses are $1 per units sold.

- Compute the unit product cost for each year under absorption costing and under variable costing.
- Prepare an income statement for each year, using the contribution approach with variable costing.
- Reconcile the variable costing and absorption costing income figures for each year.
- Explain why the net operating income for Year 2015 under absorption costing was higher than the net operating income for Year 2014, although the same number of units were sold in each year.

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