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BUS 535 WU Managerial Accounting Variable Absorption Costing Report

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ACTIVITY 3
Rushikesh Ajay Ambildhok
Managerial Accounting BUS 535
04/04/2021
Dr, Yvan Nezerwe
Westcliff University
QUESTION:
Provide income statements in both variable costing and absorption costing formats for an initial
period and its successive period in a case where all manufactured products within the two
periods are sold by the end of the second period, but number of units sold in the first period is
less than the number of units manufactured in this period. What is the interesting observation
in comparing the two types of income statements? Explain your example in detail and provide
in-text citations.
ANSWER:
The two major methods that manufacturing companies use for valuing their work in
process and their inventory of finished goods are variable costing and absorption costing.
Variable costing is also called marginal costing or direct costing. This method considers all the
variable costs which include direct labor, direct material and variable overhead. Variable
costing does not include the fixed overhead if the number of products sold are less than the
number of products manufactured for a given period.
On the other hand, absorption costing considers all the costs including direct labor,
direct material, variable overhead, and fixed overhead. Absorption costing is also known as
full costing as it does not eliminate any production costs during valuation.
Consider a manufacturing company producing 15,000 units.
Direct material cost = $3.00 per unit = $3*$15,000 = $45,000
Direct labor cost = $15.00 per unit = $15*$15,000 = $225,000
Variable overhead = $7.00 per unit = $7*$15,000 = $105,000
Total fixed overhead is $17,000 = $17,000/15,000 = $1.1 per unit.
The above costs have clearly shown in the below table.
Nature of costs
Variable costing method
Absorption costing method
Direct material
$45,000
$45,000
Direct labor
$225,000
$225,000
Variable overhead
105,000
105,000
Fixed overhead
$17,000
Total
$375,000
$392,000
If all $15,000 units are sold for a given period, the income will be same in both the income
statements (Variable costing and Absorption costing).
If the selling price of each product is $30.00, the total income will be $450,000 if all units are
sold. The fixed overhead cost of $17,000 will be included in the cost of goods sold when it

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comes to absorption costing. This overhead will be included as an administrative cost when it
comes to variable costing method.
Below are the income statements when all the units produced are sold for a given period.
Variable costing method
Absorption costing method
Total Sales
$450,000
$450,000
Total Costs
$375,000
$392,000
Gross Income
$75,000
$58,000
Fixed Overhead
$17,000 (Administrative costs)
Net Income
$58,000
$58,000
Suppose out of 15,000 units, only 12,000 are sold at the end of the first period, the fixed
overhead cost for the first period would be 12,000*$1.1/unit = $13,200. The fixed overhead
costs for the remaining 3,000 units in the inventory would be 3,000*$1.1/unit = $3,300.
Ultimately, this fixed overhead will be expensed in the next period when those 3000 units are
sold.
Cost of sold units:
Absorption costing:
Direct material cost = $3.00 per unit = $3*$12,000 = $36,000
Direct labor cost = $15.00 per unit = $15*$12,000 = $180,000
Variable overhead = $7.00 per unit = $7*$12,000 = $84,000
Fixed overhead = 12000*$1.1 = $13,200
Total costs = $36,000+$180,000+$84,000+$13,200 = $313,200
Variable costing
Direct material cost = $3.00 per unit = $3*$12,000 = $36,000
Direct labor cost = $15.00 per unit = $15*$12,000 = $180,000
Variable overhead = $7.00 per unit = $7*$12,000 = $84,000
Total costs = $36,000+$180,000+$84,000 = $300,000
Cost of units in the inventory:
Absorption costing:
Direct material cost = $3.00 per unit = $3*$3,000 = $9,000
Direct labor cost = $15.00 per unit = $15*$3,000 = $45,000
Variable overhead = $7.00 per unit = $7*$3,000 = $21,000
Fixed overhead = 3000*$1.1 = $3,300
Total costs = $9,000+$45,000+$21,000+$3,300 = $78,300
Variable costing
Direct material cost = $3.00 per unit = $3*$3,000 = $9,000
Direct labor cost = $15.00 per unit = $15*$3,000 = $45,000
Variable overhead = $7.00 per unit = $7*$3,000 = $21,000
Total costs = $9,000+$45,000+$21,000 = $75,000

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ACTIVITY 3 Rushikesh Ajay Ambildhok Managerial Accounting – BUS 535 04/04/2021 Dr, Yvan Nezerwe Westcliff University QUESTION: Provide income statements in both variable costing and absorption costing formats for an initial period and its successive period in a case where all manufactured products within the two periods are sold by the end of the second period, but number of units sold in the first period is less than the number of units manufactured in this period. What is the interesting observation in comparing the two types of income statements? Explain your example in detail and provide in-text citations. ANSWER: The two major methods that manufacturing companies use for valuing their work in process and their inventory of finished goods are variable costing and absorption costing. Variable costing is also called marginal costing or direct costing. This method considers all the v ...
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