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
To answer the questions, let's calculate the various costs and analyze them according to absorption costing and variable costing methods:
1. Total Cost for the Year:
To compute the total cost for the year, we need to consider all the relevant costs incurred.
Direct Material Cost (per unit) = $37
Total Direct Material Cost = Direct Material Cost per unit * Planned Production = $37 * 13,000
Direct Material Cost = $481,000
Conversion Cost:
Direct Labor Cost = $715,000
Variable Manufacturing Overhead = $598,000
Fixed Manufacturing Overhead = $715,000
Total Conversion Cost = Direct Labor Cost + Variable Manufacturing Overhead + Fixed Manufacturing Overhead
Selling and Administrative Costs:
Variable Selling and Administrative Cost (per unit) = $39
Total Variable Selling and Administrative Cost = Variable Selling and Administrative Cost per unit * Units Sold = $39 * 11,700
Fixed Selling and Administrative Cost = $355,700
Total Cost for the Year = Direct Material Cost + Total Conversion Cost + Total Variable Selling and Administrative Cost + Fixed Selling and Administrative Cost
2. Inventory Holding Cost:
(a) Absorption Costing:
Under absorption costing, all manufacturing costs, both variable and fixed, are absorbed into the cost of inventory. Therefore, the total cost of inventory would include both fixed and variable manufacturing overhead.
(b) Variable Costing:
Under variable costing, only the variable manufacturing costs are included in the cost of inventory. Fixed manufacturing overhead is treated as an expense and is not included in the cost of inventory.
3. Expense on Income Statement:
(a) Absorption Costing:
Under absorption costing, the fixed manufacturing overhead is included in the cost of inventory. As a result, it is not recognized as an expense on the income statement. Instead, it is expensed as the units are sold (COGS).
(b) Variable Costing:
Under variable costing, the fixed manufacturing overhead is treated as an expense and is directly included in the income statement. Therefore, the entire fixed manufacturing overhead cost would be included as an expense on the period's income statement.
To get the exact figures for inventory and expense, we need to calculate the respective costs. Let's calculate them using the given information and formulas provided above.