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Monex reported $65,000 in net profit for the year using absorption costing. The company had no units in beginning inventory, planned and actual production was 20,000 units and sales were 18,000 units during the year. Variable manufacturing costs were $20 per unit and total budgeted fixed manufacturing overhead was $100,000. There was no underapplied or overapplied overhead reported during the year. Determine the net profit under variable costing.

Question

Monex reported 65,000innetprofitfortheyearusingabsorptioncosting.Thecompanyhadnounitsinbeginninginventory,plannedandactualproductionwas20,000unitsandsaleswere18,000unitsduringtheyear.Variablemanufacturingcostswere65,000 in net profit for the year using absorption costing. The company had no units in beginning inventory, planned and actual production was 20,000 units and sales were 18,000 units during the year. Variable manufacturing costs were 20 per unit and total budgeted fixed manufacturing overhead was $100,000. There was no underapplied or overapplied overhead reported during the year. Determine the net profit under variable costing.

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Solution 1

To calculate the net profit under variable costing, we need to adjust the net profit reported under absorption costing for the change in inventory levels.

Step 1: Calculate the number of units in ending inventory. Units in ending inventory = Units produced - Units sold = 20,000 units - 18,000 units = 2,000 units

Step 2: Calculate the fixed manufacturing overhead cost per unit. Fixed manufacturing overhead cost per unit = Total fixed manufacturing overhead / Units produced = 100,000/20,000units=100,000 / 20,000 units = 5 per unit

Step 3: Calculate the fixed manufacturing overhead cost in ending inventory. Fixed manufacturing overhead cost in ending inventory = Units in ending inventory * Fixed manufacturing overhead cost per unit = 2,000 units * 5perunit=5 per unit = 10,000

Step 4: Adjust the net profit reported under absorption costing for the fixed manufacturing overhead cost in ending inventory. Net profit under variable costing = Net profit under absorption costing - Fixed manufacturing overhead cost in ending inventory = 65,000−65,000 - 10,000 = $55,000

So, the net profit under variable costing is $55,000.

This problem has been solved

Solution 2

To calculate the net profit under variable costing, we first need to understand the difference between absorption costing and variable costing.

Absorption costing includes both variable and fixed manufacturing costs in the cost of a unit of product, while variable costing includes only the variable manufacturing costs.

Given that the net profit under absorption costing is $65,000, we need to adjust this figure to exclude the fixed manufacturing overhead costs that are included in the cost of the unsold units.

Here are the steps to calculate the net profit under variable costing:

  1. Calculate the cost per unit under absorption costing: This includes both variable and fixed manufacturing costs. The total fixed manufacturing overhead is 100,000andthevariablemanufacturingcostis100,000 and the variable manufacturing cost is 20 per unit. So, the total manufacturing cost is 100,000(fixed)+100,000 (fixed) + 20 * 20,000 units (variable) = 500,000.Therefore,thecostperunitis500,000. Therefore, the cost per unit is 500,000 / 20,000 units = $25 per unit.

  2. Calculate the cost of goods sold under absorption costing: This is the cost per unit * the number of units sold = 25∗18,000units=25 * 18,000 units = 450,000.

  3. Calculate the cost of the ending inventory under absorption costing: This is the cost per unit * the number of units in ending inventory = 25∗(20,000units−18,000units)=25 * (20,000 units - 18,000 units) = 25 * 2,000 units = $50,000.

  4. Calculate the fixed manufacturing overhead cost included in the ending inventory: This is the total fixed manufacturing overhead * the proportion of units in ending inventory = 100,000∗(2,000units/20,000units)=100,000 * (2,000 units / 20,000 units) = 10,000.

  5. Adjust the net profit under absorption costing to exclude the fixed manufacturing overhead cost included in the ending inventory: This is the net profit under absorption costing - the fixed manufacturing overhead cost included in the ending inventory = 65,000−65,000 - 10,000 = $55,000.

So, the net profit under variable costing is $55,000.

This problem has been solved

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