Cold City Blowers produces snow blowers.The selling price per snow blower is $80.Costs involved in production are: $\begin{array}{lr}
\text { Direct material per unit } & \$ 22 \
\text { Direct labor per unit } & 15 \
\text { Variable manufacturing overhead per unit } & 6 \
\text { Fixed manufacturing overhead per year } & 206,400
\end{array}$ In addition, the company has fixed selling and administrative costs of $88,000 per year.During the year, Cold City Blowers produced 8,600 snow blowers and sold 8,000 snow blowers.There is no beginning inventory.Ignoring taxes, how much will full costing net income differ from variable costing net income?

Question

Quizplus · Accepted Answer

$14,400Under full costing (absorption costing), both variable and fixed manufacturing overhead costs are included in the cost of the product. Under variable costing, only variable costs (direct materials, direct labor, and variable manufacturing overhead) are included in product costs; fixed manufacturing overhead is treated as a period cost and expensed in the period incurred.To calculate the difference in net income between full costing and variable costing, we need to determine the impact of the fixed manufacturing overhead on the cost of goods sold (COGS) under both methods.Fixed manufacturing overhead per unit = Total fixed manufacturing overhead / Total units produced = $206,400 / 8,600 units = $24 per unitUnder full costing, the fixed manufacturing overhead allocated to the units sold (8,000 units) would be $24 * 8,000 = $192,000. However, since 600 units (8,600 produced - 8,000 sold) remain in inventory, under full costing, some of the fixed manufacturing overhead is deferred in inventory and not expensed in the current period. The deferred amount is $24 * 600 = $14,400.Under variable costing, all the fixed manufacturing overhead ($206,400) is expensed in the period, regardless of the number of units sold or produced.Therefore, the difference in net income between full costing and variable costing is the amount of fixed manufacturing overhead deferred in inventory under full costing, which is $14,400.

Cold City Blowers Produces Snow Blowers In Addition, the Company Has Fixed Selling and Administrative Costs