Rabin Ltd uses a perpetual FIFO inventory system and has com

Rabin Ltd uses a perpetual FIFO inventory system and has compiled the following cost information for the year ended December 31, 2017. Opening inventory consisted of 100 units. The cost per unit of opening inventory is $100 DM, $60 DL and $110 MOH (of which 20% is variable). Robin produced 1,400 units and sold 1,250 units during 2017. The selling price per unit is $320.

Answer the following for the year ended December 31, 2017 (round your answer to the nearest unit or dollar and use the rounded answer for subsequent calculations):
(a) How many units are left in ending inventory at December 31, 2017? units

(b) What is the cost per unit in ending inventory under:

                    absorption costing $/ unit?

                    variable costing $/ unit?

                    throughput costing $/ unit?

(c) Calculate the total cost of opening inventory using:

                    absorption costing $?

                    variable costing $?

                    throughput costing $?

(d) Calculate: gross profit $?

                     contribution margin $?

                     throughput margin $?

(e) Net income will be greatest under which costing method? Absorption costing or Variable costing

(f) Net income will be lowest under which costing method? Absorption costing or Variable costing

Solution

(e)

Net Income will be greatest under absorption costing. This is because under absorption costing, some cost of fixed manufacturing cost is deferred to next period. It forma part of the cost of inventory.

Net Income will be lowest under variable costing as all fixed cost for the period is booked in the same period.

If you also consider throughput costing also, then net income under throughput costing will be the lowest because only direct materials are considered while valuing inventory. Direct labour and variable cost is debited to profit and loss in the same period as it is incurred instead of deferring the cost to the extent of ending inventory to next period.