Grainger Company produces only one product and sells that product for $100 per unit. Cost information for the product is:

Direct Material

$15 per Unit

Direct Labor

$25 per Unit

Variable Overhead

$5 per Unit

Fixed Overhead

$34,000

Selling expenses are $4 per unit and are all variable. Administrative expenses of $20,000 are all fixed. Grainger produced 5,000 units; sold 4,000; and had no beginning inventory.

1. Compute net income under
2. absorption costing
3. variable costing
4. Reconcile the difference between the income under absorption and variable costing.

Solution

A.I. Absorption Costing:

Sales

Cost of Goods Sold:

Direct Materials

Direct Labor

Variable Overhead

Fixed Overhead

Subtotal

Ending Inventory

Cost of Goods Sold

Gross Profit

Selling Expenses

Administrative Expense

Net Income

II. Variable Costing:

Sales

Variable Expenses:

Direct Materials

Direct Labor

Variable Overhead

Subtotal

Ending Inventory

Variable Cost of Goods Sold

Variable Selling Expenses

Contribution Margin

Fixed Expenses:

Fixed Manufacturing Overhead

Fixed Administrative Expenses

Net Income

B.In this problem, the ______________ costing method provided more net income. The

reason for the difference is: ____________________________________________________