Absorption-costing
Variable costing
Fixed manufacturing
Fixed manufacturing
Variable manufacturing costs: $5.10 × 294,900
1,503,990
Cost of goods available for sale
1,937,490
Deduct ending inventory: $5.10 × 34,500
(175,950)
Variable cost of goods sold
1,761,540
Variable operating costs: $1.10 × 345,400
379,940
Adjustment for variances
0
Total variable costs
2,141,480
Contribution margin
5,457,320
Fixed costs
Fixed manufacturing overhead costs
1,440,000
Fixed operating costs
1,080,000
Total fixed costs
2,520,000
Operating income
$2,937,320
Absorption Costing Data
Fixed manufacturing overhead allocation rate =
Fixed manufacturing overhead/Denominator level machine-hours = $1,440,000
6,000
= $240 per machine-hour
Fixed manufacturing overhead allocation rate per unit =
Fixed manufacturing overhead allocation rate/standard production rate = $240
50
= $4.80 per unit
Income Statement for the Zwatch Company, Absorption Costing
for the Year Ended December 31, 2014
Revenues: $22 × 345,400
$7,598,800
Cost of goods sold
Beginning inventory ($5.10 + $4.80) × 85,000
$ 841,500
Variable manuf. costs: $5.10 × 294,900
1,503,990
Allocated fixed manuf. costs: $4.80 × 294,900
1,415,520
Cost of goods available for sale
$3,761,010
Deduct ending inventory: ($5.10 + $4.80) × 34,500
(341,550)
Adjust for manuf. variances ($4.80 × 5,100)a
24,480 U
Cost of goods sold
3,443,940
Gross margin
4,154,860
Operating costs
Variable operating costs: $1.10 × 345,400
$ 379,940
Fixed operating costs
1,080,000
Total operating costs
1,459,940
Operating income
$2,694,920
a Production volume variance = [(6,000 hours × 50) – 294,900] × $4.80
= (300,000 – 294,900) × $4.80
= $24,480
Total fixed costs
3,531,850
Operating income
$1,543,150
2. Fixed manufacturing overhead rate = $1,200,000 / 20,000 units = $60 per unit
2014 Absorption-Costing Based Income Statement
Revenues (17,500 units
$450 per unit)
$7,875,500
Cost of goods sold
Beginning inventory
$ 0
Variable manufacturing costs (18,000 units
$115 per unit)
2,070,000
Allocated fixed manufacturing costs (18,000 units
$60 per unit)
1,080,000
Cost of goods available for sale
3,150,000
Deduct ending inventory [500 units
($115 + $60) per unit]
(87,500)
Add unfavorable production volume variance
120,000a U
Cost of goods sold
3,182,500
Gross margin
4,692,500
Operating costs
Variable marketing costs (17,500 units
$45 per unit)
787,500
Fixed administrative costs
965,450
Fixed marketing
1,366,400
Total operating costs
3,119,350
Operating income
$1,573,150
a PVV = $1,200,000 budgeted fixed mfg. costs – $1,080,000 allocated fixed mfg. costs = $120,000 U
3. 2014 operating income under absorption costing is greater than the operating income under
variable costing because in 2014 inventory increased by 500 units. As a result, under absorption
costing, a portion of the fixed overhead remained in the ending inventory and led to a lower cost
of goods sold (relative to variable costing). As shown below, the difference in the two operating
incomes is exactly the same as the difference in the fixed manufacturing costs included in ending
versus beginning inventory (under absorption costing).
Operating income under absorption costing
$1,573,150
Operating income under variable costing
1,543,150
Difference in operating income under absorption versus variable
costing
$ 30,000
Under absorption costing:
Fixed mfg. costs in ending inventory (500 units
$60 per unit)
$ 30,000
Fixed mfg. costs in beginning inventory (0 units
$60 per unit)
0
Change in fixed mfg. costs between ending and beginning inventory
$ 30,000
4. Relative to the alternative of using contribution margin (from variable costing), the
