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Sales price P15 per unit Variable costs: SG&A P2 per unit Production P4 per unit Fixed costs (total cost...

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Question

Accounting

Sales price P15 per unit

Variable costs:

SG&A P2 per unit

Production P4 per unit

Fixed costs (total cost incurred for the

year):

SG&A P14,000

Production P20,000

During the first year, Sherrill Corporation manufactured 5,000units and sold 3,800. There was no beginning or endingwork-in-process inventory.

1. How much income before income taxes would be reported ifStanley uses absorption costing?

2. How much income before income taxes would be reported ifvariable costing was used?

3. Show why the two costing methods give different incomeamounts

Answer & Explanation Solved by verified expert
3.7 Ratings (345 Votes)

Answer for 1)

Income before taxes:

Partculars P P
Sales (3800unitsĂ—P15) 57000
(Less) Variable cost
SG&A (3800unitsĂ—P2) 7600
Production (3800unitsĂ—P4) 15200 22800
Contribution 34200
(Less) Fixed cost
SG&A(P14000Ă—3800 units/5000 units) 10640
Production(P20000Ă—3800units/5000 units) 15200 25840
Probit before Tax 8360

Answer for 2)

Partculars P P
Sales (3800 unitsĂ—P15) 57000
(Less) variable cost
SG&A (3800 UnitsĂ—P2) 7600
Production (3800 unitsĂ—P4) 15200 22800
Contribution 34200
(Less) fixed costs
SG&A 14000
Production 20000 34000
Profit before tax 200

Answer for 3)

In absorption costing only fixed costs attributed to that particular units are taken into account as they are treated to be product costs whereas in variable costing entire fixed costs are taken regardless the units in hand at the end of financial period as they are treated as period costs.
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