6.3: Units Manufactured Greater than Units Sold

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The following is a side-by-side comparison of variable and absorption costing income statements when 20,000 units have been manufactured and 15,000 units have been sold.

Units manufactured greater than units sold Manufactured 20,000 units / Sold 15,000
Variable Costing Income Statement
Sales		$750,000	15,000 x $50
Variable cost of goods sold		375,000	15,000 x $25
Manufacturing margin		$375,000
Variable selling and administrative expenses		75,000	15,000 x $5
Contribution margin		$300,000
Fixed costs:
Fixed manufacturing costs	$150,000
Fixed selling and administrative expenses	50,000
Total fixed costs		200,000
Operating income		$100,000

Units manufactured equals units sold Manufactured 20,000 units / Sold 15,000
Absorption Costing Income Statement
Sales	$750,000	15,000 x $50	• Cost of goods sold equals the 15,000 units sold times the sum of the variable manufacturing cost per unit of $25 plus the fixedmanufacturing cost per unit of $7.50 ($150,000 total fixed cost / 20,000 units produced.)
Cost of goods sold	487,500	15,000 x ($25 + $7.50)
Gross profit	$262,500
Selling and administrative expenses	125,000	(15,000 x $5) + 50,000
Operating income	$137,500

What is unchanged at 20,000 vs. 15,000 units manufactured:

The entire variable costing income statement
Selling and administrative expenses on the absorption costing income statement

When more units are manufactured than are sold, there are more units in ending inventory than there were in beginning inventory. In this case, 5,000 of the units produced were not sold, so they were added to inventory. Operating income under variable costing is lower than under absorption costing when inventory increases. This is because for variable costing the fixed factory overhead for all units produced is expensed off during the period, regardless of whether the units produced were sold. Under absorption costing, the fixed factory overhead is expensed off is only for the units sold, resulting in lower overall expenses and therefore higher operating income.