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Operating Income Analysis: Costing Methods

The document provides a financial analysis for Osawa Inc, calculating operating income under both variable and absorption costing methods. It shows that the operating income under variable costing is $200,000 while under absorption costing it is $440,000, resulting in a difference of $240,000 attributed to fixed manufacturing costs in inventory. Additionally, it includes a case study demonstrating similar principles with different figures.

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103 views5 pages

Operating Income Analysis: Costing Methods

The document provides a financial analysis for Osawa Inc, calculating operating income under both variable and absorption costing methods. It shows that the operating income under variable costing is $200,000 while under absorption costing it is $440,000, resulting in a difference of $240,000 attributed to fixed manufacturing costs in inventory. Additionally, it includes a case study demonstrating similar principles with different figures.

Uploaded by

kayayashu
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

Osawa Inc

Production = 200,000 units, Sold = 120,000 Units, Ending Inventory = 80,000


Variable Mfg cost = $ 20 per unit
Variable Non-Mfg cost = $ 10 per unit
Actual fixed mfg cost = $ 600,000/200,000 = $ 3 per unit
Actual fixed non-mfg cost = $ 400,000
Selling Price = $ 40 per unit

Required: Calculate Operating income under Variable costing and Absorption costing
methods.
$ ‘ 000s

Variable Costing Absorption costing

Sales = 120,000 x $ 40 4,800 4,800

Less: Total Variable cost (TVC)


Variable Mfg 120,000 x $ 20 (2,400)
Variable Non-Mfg 120,000 x $ 10 (1,200)

COGS :
Beginning Inventory = $ 0
+Mfg costs 200,000 x 23 = 4,600
-Ending inv (80,000) x 23 = (1,840)
----------- (2,760)
----------- ---------------
= Contribution Margin/Gross Profit 1,200 2,040

Less: Total Fixed Cost


Fixed Mfg (600)
Fixed Non-Mfg (400)

Less: Non-Mfg costs:


Variable Non-Mfg (1,200)
Fixed Non-Mfg (400)
-------- ________

= OPERATING INCOME 200 440

Reconciling factor is treating fixed mfg cost $ 3/unit in


inventory and COGS valuation under absorption costing
Difference in OI

Under variable costing = 200


Under Absorption costing = 440

Difference = 240

EI = 80,000 x Fixed Mfg cost $ 3 = 240

When Production Units > Sales Units = OI under


ABSORPTION COSTING will be > VARIABLE COSTING OI
(When there is no Beginning Inventory)
INMAN Case study solved:

BI 10,000 + PRODUCTION 100,000 – SALES 106,000 = EI


4,000 UNITS

Mfg VCP = $ 520,000/100,000 UNITS = $ 5.2


Mfg FCP = $ 200,000/100,000 UNITS = $ 2

For Absorption costing… valuation of COGS and EI will be on


Full cost ie 5.2 + 2 = $ 7.2
$ 000’s

Absorption Variable

Sales 106 x $ 12 1,272 1,272


Less: COGS (Mfg)
BI = $ 72
+Mfg 100 x 7.2 720
-EI 4 x 7.2 (28.8) (763.2)

Less: TVC
Variable Mfg 106 x 5.2 (551.2)
Variable Non-Mfg (80)
--------- -----------
= Gross Profit/CM 508.80 640.80

Less: Non-Mfg

Variable Non-Mfg (80)


Fixed Non-Mfg (300)
Less: Total Fixed cost
Fixed Mfg (200)
Fixed Non-Mfg (300)
---------- -------------
= OPERATING INCOME 128.80 140.80

Reconcile:

Difference in OI = $ 12,000

Fixed Mfg cost per unit = $ 2 ($ 200,000/100,000 units)

Due to Inventory differences = BI 10,000 – EI 4,000 = 6,000 X


$ 2 = $ 12,000 OI difference reconciled
OI under Absorption costing > than variable costing by
1000 Units EI x Fixed Moh $ 2.85 = $ 2,850

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