$4.$ Absorption and variable costing

The Polished Shoe Company is considering changing to the variable costing method of inventory

valuation for making internal decisions. The absorption costing income statements for January and

February follow:

The Polished Shoe Company

Absorption Costing Income Statement

for January and February $2020$

January February

Sales $(8,000$ units per month$)$ $$160,000$ $$160,000$

Cost of Goods Sold $ $99,200$ $$108,800$

Gross Profit $ $60,800$ $ $51,200$

Selling and Administrative Expenses $ $30,000$ $ $30,000$

Operating profit $ $30,800$ $ $21,200$

Production data follows:

January February

Production units $10,0006,000$

Variable costs per unit $$10$ $$10$

Fixed overhead costs $$24,000$ $$24,000$

The preceding selling and administrative expenses include variable selling costs of $$1$ per unit sold.

There was no inventory at the beginning of January.

Required:

$($a$)$ Calculate the absorption cost per unit manufactured for January and February.

$(2$ marks$)$

$($b$)$ Explain why the operating profit for January was higher than the operating profit for February

when the same number of units was sold in each month. $(3$ marks$)$

$($c$)$ Calculate the operating profit for January and February using variable costing.

$(3$ marks$)$

$($d$)$ Reconcile the absorption costing and variable costing operating profit figures for January and

February. $(2$ marks$)$

TOTAL: $10$ MARKS

With formulas