Hi,
If anybody can help me on below question, I'd appreciate very much.
My answer was $27,500. But, according to fedback, the correct answer shows $25,000 (Please see bold):
Valyn Corporation employs an absorption costing system for internal reporting purposes; however, the company is considering using variable costing. Data
regarding Valyn's planned and actual operations for the calendar year are presented below.
Planned Activity Actual Activity Beginning finished goods
inventory in units 35,000 35,000
Sales in units 140,000 125,000
Production in units 140,000 130,000
Planned Costs Incurred
Per unit Total Costs
Direct Material $12.00 $1,680,000 $1,560,000
Direct Labor 9.00 1,260,000 1,170,000
Variable MFG overhead 4.00 560,000 520,000
Fixed MFG overhead 5.00 700,000 715,000
Variable selling expenses 8.00 1,120,000 1,000,000
Fixed selling expenses 7.00 980,000 980,000
Variable admin. expenses 2.00 280,000 250,000
Fixed admin. expenses
3.00 420,000 425,000
Total $50.00 $7,000,000 $6,620,000
The planned per unit cost figures shown in the above schedule were based on Valyn producing and selling 140,000 units. Valyn uses a predetermined
manufacturing overhead rate for applying manufacturing overhead to its product; thus, a combined manufacturing overhead rate of $9.00 per unit was employed
for absorption costing purposes. Any over- or underapplied manufacturing overhead is closed to the Cost of Goods Sold account at the end of the reporting
year.
The beginning finished goods inventory for absorption costing purposes was valued at the previous year's planned unit manufacturing cost which was the same
as the current year's planned unit manufacturing cost. There are no work-in-process inventories at either the beginning or the end of the year. The planned and
actual unit selling price was $70.00 per unit.
The difference between Valyn Corporation's operating income calculated on the absorption costing basis and calculated on the variable costing basis was
a. 65,000.
b. $25,000.
c. $90,000.
d. $40,000.
The correct answer is: $25,000.
Using absorption costing, product costs consist of direct material, direct labor, and indirect manufacturing costs (both variable and fixed
overhead). Using variable costing, product costs consist of direct material, direct labor, and variable indirect manufacturing costs (variable
overhead). Variable costing treats fixed overhead as a period cost. Therefore, the profit under absorption costing is equal to the profit under
variable costing, plus the change in the fixed overhead in the absorption costing inventory. When the fixed overhead rate is constant, the only
difference between the operating income amounts using variable and absorption costing will be related to the fixed overhead costs.
So, calculate the difference between operating income using absorption costing and operating income using variable costing, by taking the fixed
overhead rate per unit and multiplying that by the difference between the number of units produced and the number of units sold.
In this case, the change (difference) = $5(130,000 units produced - 125,000 units sold) = $5(5,000 units) = $25,000
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Howon Kim
Accountant
Volumecocomo Apparel, Inc.
Buena Park CA
United States
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