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.
Budgeted and Actual fixed costs
Budgeted unit volume to be produced
Budgeted unit volume sold
Actual variable costs
Actual unit volume sold
Actual units produced
Beginning of year inventory
End of year inventory
What exactly is absorption costing vs. variable costing?© BrainMass Inc. brainmass.com October 25, 2018, 2:39 am ad1c9bdddf
This solution provides guidance in comparing absorption and variable costing in the attached Excel file for this assignment.
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:
Cost of goods sold
Net operating income (loss)
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.