Details Commodity A
Starting inventory (Units) 10,000
Units produced 10,000
Goods available for sale 9,000
Closing stock 1,000
Details Commodity B
Budgeted fixed manufacturing expenses $250,000
Budgeted production 10,000
Budgeted fixed manuf. Cost per unit 25
Budgeted variable cost per unit 220
Budg. Total manuf. Cost per unit 245
Variable Costing Income Statement
Details Commodity B
Units disposed 9000
Price per unit $300
Total sales of commodity $2,700,000
Variable manufacturing expense $2,200,000
COGAFS 2,200,000
Less: Closing stock (220,000)
Variable cost of products disposed 1,980,000
Add variable admin and selling costs 90,000
Total variable cost 2,070,000
Contribution Margin 630,000
Less fixed costs 350,000
Net income 280,000
Absorption Costing Income Statement
Details Commodity B
Units 9000
Selling price per unit 300
Total sales of commodity 2,700,000
Less variable manufacturing cost 2,200,000
Allocated fixed manufacturing cost 250,000
Cost of goods available for sale 2,450,000
Less ending inventory (245,000)
Cost of goods sold 2,205,000
Gross margin 495,000
Less variable admin and selling cost 90,000
Fixed admin and selling cost 100,000
Total admin and selling costs 190,000
Net income 305,000
The major aim for the distinction between absorption and variable costing is that the statement of financial performance varies in terms of fixed manufacturing overheads. It must be noted that under variable costing income statement, fixed manufacturing overheads are not involved under the cost of products sold and manufacturing overheads are part of the ending inventory ( Horngren, Sundem, Schatzberg & Burgstahler, 2013). It should also be noted that in absorption costing, fixed manufacturing overheads do not form part of the closing stock. Involving fixed manufacturing overhead in cost of goods sold under absorption costing is high compared to net income relating to variable costing ( Kaplan & Atkinson, 2015).
Assuming the selling price per unit escalates to $320 per unit;
Details Commodity B
Units sold 9000
Selling price per unit 320
Total sales 2,880,000
Variable manufacturing cost 2,200,000
Cost of products available for sale 2,200,000
Less closing inventory (220,000)
Variable cost of products disposed 1,980,000
Total variable costs 2,070,000
Contribution margin 810,000
Fixed costs (350,000)
Net income 460,000
Absorption Costing Income Statement
Details Commodity B
Units disposed 9000
Selling price 320
Total sales 2,880,000
Less: variable manufacturing cost 2,200,000
Fixed manufacturing cost 250,000
COGAFS 2,450,000
Closing inventory (245,000)
Cost of goods sold 2,205,000
Gross margin 675,000
Selling and admin costs 190,000
Net income 485,000
Break-even:
Details Particulars Particulars
Sales 300
Variable cost:
Direct material 120
Direct labor 60
Variable overhead 40
Var. selling & admin 10
Total variable expenses 230
Contribution margin per unit 70
Breakeven point = fixed expenses/contribution margin per unit
=350,000/70
Company must sell 5000 units to attain its breakeven point
Breakeven if cost of direct materials increase from $120 to $150
Details Particulars Amount
Sales 300
Direct material 150
Direct labor 60
Variable overhead 40
Variable admin and selling 10
Total variable cost 260
Contribution margin per unit 40
Breakeven point = Fixed costs/contribution margin per unit
=350,000/40
=8750 units
This means that when direct materials cost increases to 150, then the breakeven point will also rise from 5,000 to 8,750 units.
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Discussion
Absorption and marginal costing are two distinct methods of valuing the cost of goods sold and finished products in inventory. Regarding absorption costing, it is essential to note that fixed overhead are conducted as a product expense and an amount is assigned to each unit. On the other hand, marginal costing requires the treatment of fixed overheads as period expenses and are charged fully against the profit of the financial term ( Horngren, Sundem, Schatzberg & Burgstahler, 2013). These are two methods that produce slightly distinct solutions but both are essential in cost accounting for companies. The breakeven point signifies the point at which total expenses equal total revenue for a particular company. Breakeven point will enable costing accountants at Lewis Company to determine the least number of units to be produced if the organization desires to make profit.
For instance, in this case, the company should produce at least 5,000 units or more. Anything less than that means the company will operate at a loss. Selling and administration costs vary with operations of different periods and must be accounted for in both absorption and marginal costing income statements ( Fullerton, Kennedy & Widener, 2013). Both the beginning and ending inventories play a crucial role in the income statements because they denote the over-or-under absorption of units. Closing inventory should be added to the units produced at the start of a financial period to determine the total units to be sold for the period.
Closing inventory is what is referred to as opening inventory at the start of the next financial term. The selling price should be determined after careful consideration of all costs to ensure the company does not trade at a loss ( Drury, 2013). All the variable and fixed costs should be added and any other consideration considered before arriving at the selling price per unit. It is fundamental to note the selling price should not be too high or too low because this is a situation that may either keep customers off or make the company operate at a loss.
References
Drury, C. M. (2013). Management and cost accounting . Springer.
Fullerton, R. R., Kennedy, F. A., & Widener, S. K. (2013). Management accounting and control practices in a lean manufacturing environment. Accounting, Organizations and Society , 38 (1), 50-71.
Horngren, C. T., Sundem, G. L., Schatzberg, J. O., & Burgstahler, D. (2013). Introduction to management accounting . Pearson Higher Ed.
Kaplan, R. S., & Atkinson, A. A. (2015). Advanced management accounting . PHI Learning.
