Absorption and variable costing. (CMA) Miami, Inc., planned and actually manufactured 250,000 units of its single product in 2017, its first year of operation. Variable manufacturing cost was $19 per unit produced. Variable operating (nonmanufacturing) cost was $13 per unit sold. Planned and actual fixed manufacturing costs were $750,000. Planned and actual fixed operating (nonmanufacturing) costs totaled $420,000. Miami sold 170,000 units of product at $41 per unit.

Required:

1. Miami's 2017 operating income using absorption costing is:

(a) $ 600,000

(b) $ 360,000

(c) $ 780,000

(d) $ 1,020,000

(e) None of above

2. Miami's 2017 operating income using variable costing is: (a) $ 1,100,000 (b) $ 600,000 (c) $ 360,000 (d) $ 780,000 (e) None of above

1. (b) $ 360,000

2. (c) $ 360,000

Explanation:

Miami, Inc.

Absorption Costing

Income Statement

Sales 170,000 units * $41 $ 6970,000

Variable manufacturing cost $19 * 170,000 units = 3230,000

Actual fixed manufacturing costs $750,000

Contribution Margin $ 2990,000

Variable operating (non manufacturing) cost $13 * 170,000 units = 2210,000

Actual fixed operating (non manufacturing) costs $420,000

Operating Income $ 360,000

The difference b/w variable and absorption costing is that in variable costing the variable expenses are treated as product costs and fixed expenses as period costs. But in absorption costing the manufacturing expenses variable and fixed are treated as product costs and selling and administrative expenses both fixed and variable are treated as period costs.

Miami, Inc.

Variable Costing

Income Statement

Sales 170,000 units * $41 $ 6970,000

Variable manufacturing cost $19 * 170,000 units = 3230,000

Variable operating (non manufacturing) cost $13 * 170,000 units = 2210,000

Contribution Margin $1530,000

Actual fixed manufacturing costs $750,000

Actual fixed operating (non manufacturing) costs $420,000

Operating Income $ 360,000