13-45 Variable and Absorption Costing
Chan Manufacturing Company data for 20X7 follow:


Sales: 12,000 units at $17 each
Actual production 15,000 units
Expected volume of production 18,000 units
Manufacturing costs incurred
Variable $120,000
Fixed 63,000
Nonmanufacturing costs incurred
Variable $24,000
Fixed 18,000

Determine operating income for 20X7, assuming the firm uses the variable-costing approach to
product costing. (Do not prepare a statement.)






Assume that there is no January 1, 20X7, inventory; no variances are allocated to inventory; and
the firm uses a “full absorption” approach to product costing. Compute (a) the cost assigned to
December 31, 20X7, inventory; and (b) operating income for the year ended December 31, 20X7.
(Do not prepare a statement.)

1)
Product cost = Manufacturing cost (variable) + Nonmanufacturing costs incurred(variable)
= 120000+24000 = 144000
Per unit cost of production = 144000/15000 = 9.6
Cost assigned to inventory = 3000 * 15 = 28800


Operating income = Sales – product cost – fixed costs
= 12000*17 – 12000*9.6 – 63000-18000
= 7800


2) a)

Ending Inventory = 15,000 units – 12,000 units = 3,000 units

Cost of Ending Inventory = 3,000 units x ($8 + $63,000 / 18,000 units)
Cost of Ending Inventory = 3,000 units x $11.50
Cost of Ending Inventory = $34,500

b)
Total Cost = $120,000 + $63,000 + $24,000 + $18,000 = $225,000

Operating Income = (12,000x $17) – ($225,000 – $34,500)
Operating Income = $204,000 – $190,500
Operating Income = 13,500


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