Direct materials $20

Direct labor $30

Manufacturing overhead $10

Selling and administrative $25

Variable manufacturing overhead $20 + $30 + $10 + $25= $85

Manufacturing overhead $25,000

Selling and administrative $40,000

Fixed cost for each period $25,000 + $40,000 = $65,000

Fixed overhead cost Fixed cost for each period / Productions in period

= 65,000 / 5000 = $13

Produced 5000 units

Sold 4600 units

Selling price per unit $120

 ❖ Absorption costing:

Cost of production

- Variable cost: $85 * 5000 units = $425,000

- Fixed cost: $65,000

Closing stock ($85 + $13) * (5000 units – 4600 units) = $39,200

Cost of Goods sold Fisrt way: ($85 + $13) * 4600 units = $450,800

Second way: Variable cost + Fixed cost – Closing stock

= $425,000 + $65,000 - $39,200 = $450,800

Sales $120 * 4600 units = $552,000

Gross profit Sales – COGS = $552,000 - $450,800 = $101,200

❖ Variable costing:

Cost of production

- Variable cost: $85 * 5000 units = $425,000

Closing stock $85 * (5000 units – 4600 units) = $34,000

Cost of Goods sold Fisrt way: $85 * 4600 units = $391,000

Second way: Variable cost – Closing stock

= $425,000 - $34,000 = $391,000

Total cost COGS + Fixed cost = $391,000 + $65,000 = $456,000

Sales $120 * 4600 units = $552,000

Gross profit Sales – Total cost = $552,000 - $456,000 = $96,000

❖ Explain different between Variable costing and Absorption costing:

Variable costing only includes the variable costs directly incurred in production but excludes any fixed
costs, while Absorption costing includes all costs associated with the manufacturing of a product. Only
organizations that incur costs of goods sold (COGS) on their income statement will consider absorption vs.
variable costing. Because public firms are obligated to employ absorption costing due to their GAAP
accounting obligations, absorption costing vs. variable costing is not an option for them.