variable costing and absorption costing
1. Please provide general discussion on variable costing with inline citations, and supporting with the example below
| Unit price | $500 | Variable Costing Income Statement | |||
| Unit Direct materials | $100 | sales | $700,000 | ||
| Unit direct labor | $80 | variable costs | |||
| Unit Indirect materials | $50 | Direct materials | $140,000 | ||
| Unit indirect labor | $40 | Direct labor | $112,000 | ||
| Unit variable selling and admin | $20 | Indirect materials | $70,000 | ||
| Fixed over head | $10,000 | Iniderct labor | $56,000 | ||
| Fixed selling and admin | $80,000 | Variable selling and admin | $28,000 | ||
| Units sold | 1400 | $406,000 | |||
| CM | $294,000 | ||||
| Fixed costs | |||||
| Fixed overhead | $10,000 | ||||
| Fixed selling and admin | $80,000 | ||||
| $90,000 | |||||
| Operating income | $204,000 | ||||
2. Please provide general discussion on Absorption costing income statement and its difference from variable costing format provide inline citation. Include the example below.
| Unit Price | $400 | ||||
| unit direct materials | $40 | ||||
| Unit diirect labor | $40 | ||||
| unit indirect material | $10 | ||||
| unit indirect labour | $5 | ||||
| unit variable selling and admin | $12 | ||||
| fixed overhead | $100,000 | ||||
| fixed selling and admin | $50,000 | ||||
| Period 1 | Period 2 | ||||
| units sold | 60000 | 40000 | |||
| units manufactured | 80000 | 20000 | |||
| note: all units manufactured should be sold at the end of period 2 | |||||
| So if we do income statement right the sum of the incomes in the two periods will be the same in both formats, Despite monthly incomes being different as shown below. | |||||
| fixed over head absorbed in each unit manufactured in period 1 | $1.25 | ||||
| fixed over head absorbed in each unit manufactured in period 2 | $5 | ||||
| Variable Costing Format | Absorption Costing Format | |||||
| period 1 | period 2 | period 1 | period 2 | |||
| Sales | $24,000,000 | $16,000,000 | Sales | $ 24,000,000 | $ 16,000,000 | |
| variable costs | variable costs | |||||
| direct Materials | $2,400,000 | $1,600,000 | direct Materials | $ 2,400,000 | $ 1,600,000 | |
| direct labour | $2,400,000 | $1,600,000 | direct labour | $ 2,400,000 | $ 1,600,000 | |
| indirect materials | $600,000 | $400,000 | indirect materials | $ 600,000 | $ 400,000 | |
| indirect labour | $300,000 | $200,000 | indirect labour | $ 300,000 | $ 200,000 | |
| variable selling and admin | $720,000 | $480,000 | fixed overhead | $ 75,000 | $ 125,000 | |
| variable costs | $6,420,000 | $4,280,000 | Manufacturing Cost | $ 5,775,000 | $ 3,925,000 | |
| CM | $17,580,000 | $11,720,000 | Gross Margin | $ 18,225,000 | $ 12,075,000 | |
| Fixed Cost | Selling & Admin Cost | |||||
| fixed over head | $100,000 | $100,000 | Variable selling $ admin | $720,000 | $480,000 | |
| fixed selling and admin | $50,000 | $50,000 | Fixed selling & admin | $50,000 | $50,000 | |
| total fixed costs | $150,000 | $150,000 | Selling & admin Cost | $770,000 | $530,000 | |
| operating income | $17,430,000 | $11,570,000 | Operating Income | $17,455,000 | $11,545,000 | |
| $29,000,000 | $29,000,000 | |||||
