7. What is the amount of the difference between the variable costing and absorp costing net operating incomes (losses)? Difference of Variable Costing and Absorption Costing Net Operating Inco Variable costing net operating income (loss) Absorption costing net operating income (loss)
7. What is the amount of the difference between the variable costing and absorp costing net operating incomes (losses)? Difference of Variable Costing and Absorption Costing Net Operating Inco Variable costing net operating income (loss) Absorption costing net operating income (loss)
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
Transcribed Image Text:**Transcription for Educational Use**
Diego Company manufactures one product that is sold for $75 per unit in two geographic regions—the East and West regions. The following information pertains to the company's first year of operations in which it produced 46,000 units and sold 42,000 units.
**Variable costs per unit:**
- Manufacturing:
- Direct materials: $25
- Direct labor: $20
- Variable manufacturing overhead: $4
- Variable selling and administrative: $4
**Fixed costs per year:**
- Fixed manufacturing overhead: $644,000
- Fixed selling and administrative expense: $388,000
The company sold 31,000 units in the East region and 11,000 units in the West region. It determined that $200,000 of its fixed selling and administrative expense is traceable to the West region, $150,000 is traceable to the East region, and the remaining $38,000 is a common fixed expense. The company will continue to incur the total amount of its fixed manufacturing overhead costs as long as it continues to produce any amount of its only product.
**Question:**
7. What is the amount of the difference between the variable costing and absorption costing net operating incomes (losses)?
**Difference of Variable Costing and Absorption Costing Net Operating Income (Loss):**
- Variable costing net operating income (loss)
- Absorption costing net operating income (loss)
Transcribed Image Text:### Case Study: Cost Analysis for a Manufacturing Company
#### Background Information
A manufacturing company produces and sells a product for $75 per unit, targeting two primary geographic regions: the East and West. This case study focuses on the company’s initial year of operations, during which it manufactured 46,000 units and sold 42,000 units.
#### Cost Breakdown Per Unit:
- **Direct Materials**: $25
- **Direct Labor**: $20
- **Variable Manufacturing Overhead**: $2
- **Variable Selling and Administrative Expenses**: $4
#### Annual Fixed Costs:
- **Fixed Manufacturing Overhead**: $644,000
- **Fixed Selling and Administrative Expenses**: $388,000
In the first year, the company sold 31,000 units in the East region and 11,000 units in the West region. It's estimated that $200,000 of the fixed selling and administrative expenses is attributed to the West region, $150,000 to the East region, with a remaining $38,000 as a common fixed cost.
The company plans to maintain these fixed manufacturing overhead expenses as long as it continues the production of its sole product.
#### Discussion Point
**Question**: What is the difference between the net operating incomes (or losses) under variable costing versus absorption costing?
To analyze this, examine the variable and fixed components of costing for insights into how each method impacts net operating income.
#### Diagram/Chart Explanation
*Note: The provided document does not contain any specific diagrams or charts, but it references a table for comparing variable costing and absorption costing net operating income (losses), which would typically be found below the textual information. Ensure students understand how to differentiate and calculate the costs using both methods.*
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This detailed financial breakdown provides insights into cost management strategies and their impact on profitability in different sales contexts, catering to advanced accounting students or professionals seeking to understand cost behavior and income reporting.
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