Skip to main content
Business LibreTexts

6.4: Units manufactured less than units sold

  • Page ID
    44237
  • \( \newcommand{\vecs}[1]{\overset { \scriptstyle \rightharpoonup} {\mathbf{#1}} } \) \( \newcommand{\vecd}[1]{\overset{-\!-\!\rightharpoonup}{\vphantom{a}\smash {#1}}} \)\(\newcommand{\id}{\mathrm{id}}\) \( \newcommand{\Span}{\mathrm{span}}\) \( \newcommand{\kernel}{\mathrm{null}\,}\) \( \newcommand{\range}{\mathrm{range}\,}\) \( \newcommand{\RealPart}{\mathrm{Re}}\) \( \newcommand{\ImaginaryPart}{\mathrm{Im}}\) \( \newcommand{\Argument}{\mathrm{Arg}}\) \( \newcommand{\norm}[1]{\| #1 \|}\) \( \newcommand{\inner}[2]{\langle #1, #2 \rangle}\) \( \newcommand{\Span}{\mathrm{span}}\) \(\newcommand{\id}{\mathrm{id}}\) \( \newcommand{\Span}{\mathrm{span}}\) \( \newcommand{\kernel}{\mathrm{null}\,}\) \( \newcommand{\range}{\mathrm{range}\,}\) \( \newcommand{\RealPart}{\mathrm{Re}}\) \( \newcommand{\ImaginaryPart}{\mathrm{Im}}\) \( \newcommand{\Argument}{\mathrm{Arg}}\) \( \newcommand{\norm}[1]{\| #1 \|}\) \( \newcommand{\inner}[2]{\langle #1, #2 \rangle}\) \( \newcommand{\Span}{\mathrm{span}}\)\(\newcommand{\AA}{\unicode[.8,0]{x212B}}\)

    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.

    Units manufactured greater than units sold Manufactured 10,000 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 10,000 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 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)

    Gross profit

    $175,000

     

    Selling and administrative expenses

    125,000

    (15,000 x $5) + 50,000

    Operating income

    $50,000

     

    What is unchanged at 10,000 vs. 15,000 units manufactured:

    1. The entire variable costing income statement
    2. 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.


    This page titled 6.4: Units manufactured less than units sold is shared under a CC BY-SA 4.0 license and was authored, remixed, and/or curated by Christine Jonick (GALILEO Open Learning Materials) via source content that was edited to the style and standards of the LibreTexts platform; a detailed edit history is available upon request.