Timmer Corporation just started business in January. There were no beginning inventories. During the year, it manufactured 12,000 units of product and sold 10,000 units. The selling price of each unit was $20. Variable manufacturing costs were $4 per unit, and variable selling and administrative costs were $2 per unit. Fixed manufacturing costs were $24,000, and fixed selling and administrative costs were $6,000. What would be the difference in Timmer's net income for the year if it used variable costing instead of absorption costing?

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stokholm stokholm · Answer 1 · 2019-08-09T10:33:35+02:00

Answer:

Difference in case variable costing is used then absorption = $110,000 - $114,000 = - $4,000

That is profit will be less by $4,000

Explanation:

Total Profit as per Variable Costing

Cost of goods manufactured = $4 [tex]\times[/tex] 12,000 = $48,000

Fixed Cost = $24,000

Variable Selling Expense = $2 [tex]\times[/tex] 10,000 = $20,000

Fixed Selling And Administrative = $6,000

Total cost of manufacturing of 10,000 units = $40,000 + $24,000 = $64,000

Total Selling & Administrative = $20,000 + $6,000 = $26,000

Total cost = $64,000 + $26,000 = $90,000

Revenue = $20 [tex]\times[/tex] 10,000 = $200,000

Profit = $200,000 - $90,000 = $110,000

Profit As Per Absorption Costing

Cost of goods sold

Variable manufacturing = $4 [tex]\times[/tex] 10,000 = $40,000

Fixed Cost of manufacturing = $24,000/12,000 [tex]\times[/tex] 10,000 = $20,000

Variable Selling Expense = $2 [tex]\times[/tex] 10,000 = $20,000

Fixed Selling & Administrative = $6,000

Total = $40,000 + $20,000 + $20,000 + $6,000 = $86,000

Profit = $200,000 - $86,000 = $114,000

Difference in case variable costing is used then absorption = $110,000 - $114,000 = - $4,000

That is profit will be less by $4,000