Question

Trio Company reports the following information for the current year, which is its first year of operations. Direct materials $ 14 per unit Direct labor $ 16 per unit Overhead costs for the year Variable overhead $ 67,500 per year Fixed overhead $ 135,000 per year Units produced this year 22,500 units Units sold this year 16,500 units Ending finished goods inventory in units 6,000 units Compute the cost per unit of finished goods using 1) absorption costing and 2) variable costing.Cost per unit of finished goods using: Absorption costing Variable CostingCost per unit of finished goods Determine the cost of ending finished goods inventory using 3) absorption costing and 4) variable costing.Cost per unit of finished goods using: Absorption costing Variable CostingNumber of units in finished goods Total cost of finished goods inventory

Answer 1

I will answer all of the parts in this table, look there for each value you are asked for:

ABSORPTION COSTING VARIABLE COSTING

Direct Materials 14 14

Direct Labor 16 16

Variable Overhead 3 3

Fixed Overhead 6 do not include them

Unit Cost 39 33

Ending Inventory (UNITS) 6,000 6,000

Ending Inventory (Dollars) $234,000 98,000

Units Sold 16500 16500

Cost of Goods Sold $643,500 $544,500

Net Income diference 36000

Step-by-step explanation:

The variable costing Does not consider the fixed cost part of the unit cost, so they are posted entirely in the net income as expenses.

While the Absorption costing does include them in the unit cost, giving a higher unit value.

This diference (include or not the fixed assets) do not alter the ending inventory or the cost of goods sold, and indirectly the net income as long as the production and the sales equals. Once they difer, what it is happening is that some part of the fixed cost, which are expose entirely as expense in the net income under the variable cost, are hidden inside the ending inventory under the absorption cost.

The unit fixed cost times the ending inventory ($6 x 6,000) makes for the diference in both, net income and ending inventory.

As a result the company looks better under absorption cost, because it has better aassets an a net income higher, but behind that is one of reasons for the failure of absorption cost ot represent the reality. Currently, ABC or standart cost are more common because they have ways to handle this diferences and keep record of them.