Adelphia Corporation, which uses absorption costing, just completed its first year of operations. Planned and actual production equaled 13,000 units, and sales totaled 11,700 units at $184 per unit. Cost data for the year are as follows:
Direct material (per unit) $ 37
Conversion cost:
Direct labor 715,000
Variable manufacturing overhead 598,000
Fixed manufacturing overhead 715,000
Selling and administrative costs:
Variable (per unit) 39
Fixed 355,700
Required:
1.
Compute the company’s total cost for the year assuming that variable manufacturing costs are driven by the number of units produced, and variable selling and administrative costs are driven by the number of units sold.
2.
How much of this cost would be held in year-end inventory under (a) absorption costing and (b) variable costing?
3.
How much of the company's total cost for the year would be included as an expense on the period's income statement under (a) absorption costing and (b) variable costing?
thanks
1. To compute the company's total cost for the year, we need to calculate the different cost components based on the given data.
a) Direct materials cost per unit: $37
Total direct materials cost = Direct materials cost per unit x Actual production
Total direct materials cost = $37 x 13,000 units = $481,000
b) Direct labor cost: $715,000
c) Variable manufacturing overhead: $598,000
d) Fixed manufacturing overhead: $715,000
e) Variable selling and administrative costs per unit: $39
Total variable selling and administrative costs = Variable selling and administrative costs per unit x Units sold
Total variable selling and administrative costs = $39 x 11,700 units = $457,300
f) Fixed selling and administrative costs: $355,700
Total cost for the year = Total direct materials cost + Direct labor cost + Variable manufacturing overhead + Fixed manufacturing overhead + Total variable selling and administrative costs + Fixed selling and administrative costs
Total cost for the year = $481,000 + $715,000 + $598,000 + $715,000 + $457,300 + $355,700 = $3,322,000
2. a) Under absorption costing, the total cost is allocated to both production and inventory. Since the company produced 13,000 units and sold 11,700 units, there will be 1,300 units remaining in inventory.
Cost per unit for absorption costing = Total cost for the year / Actual production
Cost per unit for absorption costing = $3,322,000 / 13,000 units = $255.54 per unit
Inventory value under absorption costing = Cost per unit for absorption costing x Remaining units in inventory
Inventory value under absorption costing = $255.54 x 1,300 units = $332,002
b) Under variable costing, only variable costs are included in inventory. Since variable costs are driven by the number of units produced, there is no fixed manufacturing overhead included in inventory.
Variable cost per unit = Direct materials cost per unit + Direct labor cost per unit + Variable manufacturing overhead per unit + Variable selling and administrative costs per unit
Variable cost per unit = $37 + $715,000 / 13,000 units + $598,000 / 13,000 units + $39 = $37 + $55 + $46 + $39 = $177 per unit
Inventory value under variable costing = Variable cost per unit x Remaining units in inventory
Inventory value under variable costing = $177 x 1,300 units = $230,100
3. a) Under absorption costing, the total cost for the year is apportioned between cost of goods sold and ending inventory. Cost of goods sold is calculated as the cost per unit multiplied by the units sold.
Cost of goods sold under absorption costing = Cost per unit for absorption costing x Units sold
Cost of goods sold under absorption costing = $255.54 x 11,700 units = $2,994,198
The remaining cost will be included in ending inventory on the balance sheet.
b) Under variable costing, the fixed manufacturing overhead is treated as a period expense and is not included in the product cost. Therefore, the entire fixed manufacturing overhead is included in the cost of goods sold.
Cost of goods sold under variable costing = Variable cost per unit x Units sold + Fixed manufacturing overhead
Cost of goods sold under variable costing = $177 x 11,700 units + $715,000 = $2,747,900 + $715,000 = $3,462,900
The fixed manufacturing overhead is not included in the ending inventory and is expensed in the period's income statement.