Question

MicroDecor produces stylish microwave ovens. Each unit sells for $620. During 20X7, the company produced 23,000 units, and sold 21,000 units. Beginning inventory contained a total of 3,200 units. Production and SG&A costs have been stable for many years. Assume the per unit costs in beginning and ending inventory are identical. Per unit cost information follows: Direct materials cost $160 Direct labor cost 110 Variable factory overhead 85 Variable SG&A 60 Annual fixed manufacturing overhead is $245,000. Annual fixed SG&A totals $1,500,000. (a) Determine the number of units in ending inventory, and calculate the total carrying cost using both variable and absorption costing. (b) Calculate 20X7 net income using variable costing. (c) Calculate 20X7 net income using absorption costing.

Answer 1

Answer:

beginning inventory = 3,200 units

units produced during the year = 23,000

units sold during the year = 21,000

ending inventory = 23,000 + 3,200 - 21,000 = 5,200 units

variable costs per unit:

• direct labor = $110
• direct materials = $160
• factory overhead = $85
• SG&A = $60
• total = $415

fixed costs:

• factory overhead = $245,000
• SG&A = $1,500,000
• total = $1,745,000
• per unit = $1,745,000 / 23,000 = $75.87 per unit

A) Variable costing calculates COGS using only variable costs since fixed costs are considered period costs and are not carried over.

carrying value of initial inventory:

• using variable costing = $415 x 3,200 units = $1,328,000
• using absorption costing = ($415 + $75.87) x 3,200 = $1,570,784

carrying value of ending inventory:

using variable costing = $415 x 5,200 units = $2,158,000

using absorption costing = ($415 + $75.87) x 5,200 = $2,552,524

B) net profit using variable costing:

total revenue = 21,000 x $620 = $13,020,000

- COGS = 21,000 x $415 = $8,715,000

gross contribution margin = $4,305,000

- total fixed costs = $1,745,000

net income = $2,560,000

C) net profit using absorption costing:

first we need to determine COGS = carrying value beginning inventory + (17,800 x variable manufacturing costs per unit) + (17,800 x fixed manufacturing costs per unit) = $1,570,784 + (17,800 x $355) + (17,800 x $10.6522) = $1,570,784 + $6,319,000 + $189,609 = $8,079,393

total revenue = $13,020,000

- COGS = $8,079,393

gross margin = $4,940,607

- variable SG&A = 17,800 x $60 = $1,068,000

- fixed SG&A = 17,800 x ($1,500,000 / 23,000) = $1,160,870

net income = $2,711,737