Question

During its first year of operations, the McCormick Company incurred the following manufacturing costs: Direct materials, $7 per unit, Direct labor, $5 per unit, Variable overhead, $6 per unit, and Fixed overhead, $270,000. The company produced 27,000 units, and sold 18,500 units, leaving 8,500 units in inventory at year-end. Income calculated under variable costing is determined to be $355,000. How much income is reported under absorption costing?

Answer 1

Answer:

The income under Absorption and Variable Costing would be the same However Contribution Margin would be different.

The income under absorption costing would be the same as the contribution margin under absorption costing.

But contribution margin under variable costing would be different than income under variable costing.

Income Under Variable Costing                 $355,000

Income Under Absorption Costing                 $355,000

Explanation:

The income under Absorption and Variable Costing would be the same However Contribution Margin would be different.

McCormick Company

Absorption Costing Income Statement

Sales 18,500 units,                                     $ 292,000

Direct materials, $7 per unit,* 18,500 = $ 129,500

Direct labor, $5 per unit,*18,500= $ 92,500

Variable overhead, $6 per unit,* 18,500= $ 111,000

Less Fixed overhead, $270,000

Income Under Absorption Costing                 $355,000

McCormick Company

Variable Costing Income Statement

Sales 18,500 units,                                     $ 292,000

Direct materials, $7 per unit,* 18,500 = $ 129,500

Direct labor, $5 per unit,*18,500= $ 92,500

Variable overhead, $6 per unit,* 18,500= $ 111,000

Contribution Margin  $ 625,000

Less Fixed overhead, $270,000

Income Under Variable Costing                 $355,000