6.3: Units Manufactured Greater than Units Sold
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.
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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 |
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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 fixedmanufacturing cost per unit of $7.50 ($150,000 total fixed cost / 20,000 units produced.) |
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Cost of goods sold |
487,500 |
15,000 x ($25 + $7.50) |
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Gross profit |
$262,500 |
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Selling and administrative expenses |
125,000 |
(15,000 x $5) + 50,000 |
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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.