6.4: Units manufactured less than units sold
- Page ID
- 44237
The following is a side-by-side comparison of variable and absorption costing income statements when 10,000 units have been manufactured and 15,000 units have been sold.
Variable Costing Income Statement |
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Sales |
$750,000 |
15,000 x $50 |
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Variable cost of goods sold |
375,000 |
15,000 x $25 |
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Manufacturing margin |
$375,000 |
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Variable selling and administrative expenses |
75,000 |
15,000 x $5 |
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Contribution margin |
$300,000 |
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Fixed costs: |
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Fixed manufacturing costs |
$150,000 |
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Fixed selling and administrative expenses |
50,000 |
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Total fixed costs |
200,000 |
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Operating income |
$100,000 |
Absorption Costing Income Statement |
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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 fixed manufacturing cost per unit of $15 ($150,000 total fixed cost / 10,000 units produced.) |
Cost of goods sold |
575,000 |
5,000 x ($25 + $10) + 10,000 x ($25 + $15) |
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Gross profit |
$175,000 |
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Selling and administrative expenses |
125,000 |
(15,000 x $5) + 50,000 |
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Operating income |
$50,000 |
What is unchanged at 10,000 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 sold than are manufactured, there are fewer units in ending inventory than there were in beginning inventory. Some of the beginning inventory had to be sold to fulfill the order for more than what was produced. In this case, 5,000 of the units sold came from beginning inventory. Operating income under variable costing is higher than under absorption costing when inventory decreases. This is because under variable costing the fixed factory overhead that is expensed off during the period is only for units produced, even if more units are sold than were produced. Under absorption costing, the fixed overhead is included in the higher number of units sold, resulting in higher overall expenses and therefore lower operating income.