Craig Company has per-unit fixed and variable manufacturing costs of $40 and $15, respectively. Variable selling and administrative costs are $9 per unit. Consider the two independent cases that follow for the firm. Case A: Variable-costing income, $110,000; sales, 6,000 units; production, 6,000 unitsCase B: Variable-costing income, $178,000; sales, 7,500 units; production, 7,100 unitsRequired: A. From a product-costing perspective, what is the basic difference between absorption costing and variable costing?B. Compute Craig's absorption-costing income in Case A.C. Compute Craig's absorption-costing income in Case B.
What will be an ideal response?
A. The difference between absorption costing and variable costing lies in the treatment of fixed manufacturing overhead. Under absorption costing, fixed manufacturing overhead is a product cost and attached to each unit produced. In contrast, under variable costing, it is written off (expensed) as a period cost.
B. Since the number of units sold equals the number of units produced, variable- and absorption-income figures are the same: $110,000.
C. With sales of 7,500 units and production of 7,100 units, income computed under absorption costing includes $16,000 (400 units × $40) of prior-period fixed manufacturing overhead. Absorption income is therefore $162,000 ($178,000 - $16,000).
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