Discussion Topic 1: Absorption vs. Variable Costing

In this week’s discussion, we will examine the effects of absorption costing and variable costing on net income.

Harris Company’s fixed overhead costs are $4 per unit, and its variable overhead costs are $8 per unit. In the first month of operations, 50,000 units are produced and 46,000 units are sold. Write a short memo to the chief operating officer explaining which costing approach will produce the higher income and what the difference will be.

Just do response each posted # 1to 3 down below only

Posted 1

Hello Class and Instructor,

MEMO

To: Chief Financial Officer

Dear Sir or Madam

To completely understand the absorption vs. variable costing, it would best to define both. It mainly pertains to the allocation of manufacturing costs and its effect on reporting of net income. Under the absorption costing method, sales and marketing expenses are treated as a period cost, and hence expenses are recorded as and when incurred. In the variable costing method, product cost includes just the direct costs and variable manufacturing costs.

If the variable cost was used with the Harris Company, then or cost of sales would be more and decrease profit. On the other hand, if the absorption cost is used, the out cost would be low, and revenue would increase. Because of the increase in revenue, the absorption cost approach would be better to apply for the simple reason it has a fixed overhead that is deductible per unit basis. The difference in net income would be: (50000 – 46000) x4 = 16000.

Posted 2

MEMO:
CFO

11/08/2019

Sean Meadows

RE: Absorption vs. Variable Costing

Sir/Madam,

I have recently done some research and I believe I have discovered something of use the company may benefit from knowing. I have provided below a summary of my calculations for review and please let me know what you think about these findings:

Units produced 50,000

Units sold 46,000

Remaining Units 4,000

Fixed Cost $200,000

Fixed Cost Solution –> ($4 x 50,000)

We understand there are two different methods the company can utilize. These two methods are absorption costing and variable costing. Below are the said methods:

Absorption Costing $552,000

Variables:

Units Sold (46,000)

Cost per Unit (Variable Overhead 8 + Fixed 4)

Formula –> 46,000 x $12 = $552,000

Variable Costing $568,000

Variables:

Units Sold (46,000)

Cost per Unit ($8)

Fixed Overhead ($200,000)

Formula –> 46,000 x $8 = $368,000 + $200,000 = $568,000

As you can see from the above calculations there is a difference in

profits by a total of $16,000. This being said we would have more

revenue by using the absorption method. Sir/Madam please get back to me

with your thoughts on my findings.

Posted 3

Hello Class and Professor,

In absorption costing approach will report higher net income because in absorption costing approach fixed overhead cost is deducted per unit basis but in variable cost fixed overhead cost will be treated as period cost and whole amount deducted so absorption costing approach will report higher net income.

Amount will net income be different = (50000-46000) *4 = 16000

	Hello Class and Professor,
	Please find below the calculation of the costing under two methods, if we go under variable costing method
	than our cost of sales will be more and less profit and if we go for absorption costing than the out cost
	will be low and revenue will be more. There is difference of Profit is (568,000 – 552,000) = $ 16,000
	CALCUALTION OF cost of production units by using absorption and variable Costing
	Opening stock	0
	Unit Produced =	50000
	Unit Sold =	46000
	Closing Stock =	4000
		Year 1
	Calculation of recovery rate of Fixed Expenses =
	Fixed Expenses = ($ 4 X 50,000 units) =	$ 200,000
	Particulars	Absorption Costing	Variable Costing
	Variable Overhead Cost =	$ 8.00	$ 8.00
	Fixed Manufacturing Overhead	$ 4.00	$ –
	Cost of Production per unit	$ 12.00	$ 8.00
	Cost of production under Absorption costing =
	Production of 46,000 units = 46,000 units X $ 12 =	$ 552,000.00
	Cost of production under Variable costing =
	Production of 46,000 units = 46,000 units X $ 8 =	$ 368,000.00
	Add: Fixed Overhead =	$ 200,000.00
	Total Cost	$ 568,000.00