Accounting: What the Numbers Mean 9th Edition by Wayne W McManus, Daniel F Viele, David H Marshall

Exercise 1

Variable versus absorption costing TroutPro Co. manufactures fishing equipment. During 2010, total costs associated with manufacturing 35,000 fly-cast fishing rods (a new product introduced this year) were as follows:

Raw materials	$372,500
Direct labor	99,000
Variable manufacturing overhead	67,500
Fixed manufacturing overhead	105,000

Required:

a.Calculate the cost per fishing rod under both variable costing and absorption costing.

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b. If 750 of these fishing rods were in finished goods inventory at the end of 2010, by how much and in what direction (higher or lower) would 2010 operating income be different under variable costing than under absorption costing?

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c. Express the fishing rod cost in a cost formula. What does this formula suggest the total cost of making an additional 500 fishing rods would be?

Step 1 of 6

Variable costing:

Variable costing is one of the costing methods that allocate only variable costs to the product. The change in level of output will cause change in variable costs. This is also known as direct costing.

Absorption costing:

Absorption costing is one of the costing methods that allocated all costs to the products irrespective of type of cost. It allocates both variable cost and fixed cost to the product. This is also known as full costing.