Hello Tejas,

I can try.

The main difference between Absorption Costing and Variable Costing is Fixed Overhead (FOH) costs.

Hence, when the question says, Absorption Costing Income is $3,600 lower than Variable Costing Income, it means that the difference is nothing but FOH costs which have not been accounted in the Variable Costing method.

Now that the FOH total cost has been derived, we need to compute the FOH per unit cost.

The questions mentions a total Production Cost of $11; a total Variable Cost of $9 out of which $1 accounts for Variable Selling Expenses.

Total Production Cost per unit = Variable Costs per unit + Fixed Costs per unit

$11 = ($9 - $1)* + x

On solving x, we derive the Fixed Cost per unit to be $3

*a total Variable Cost of $9 out of which $1 accounts for Variable Selling Expenses, so we need to subtract the Variable Selling Expenses per unit to find the actual Variable Cost per unit.

Now that we have derived the Fixed Cost per unit, we need to find the number of units in hand. (the reason I said number of units in hand is because the question mentions the units sold and is asking us to derive the number units produced, so the only logical explanation is that there were some units held prior to production)

Fixed Cost per unit = Total Fixed Costs / Number of units

$3 = $3600/x

On solving x, the number of excess units in hand were 1,200.

Now from the question, we know the number of Units Sold is 10,000.

Unit Sales = Units produced + Excess units in hand

10,000 = X + 1,200

On solving x, the units produced were 8,800.

I hope this helps!

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Vinti Shahani

Consultant

Juffair

Bahrain

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Original Message:

Sent: 06-09-2021 02:00 PM

From: Tejas Doke

Subject: Absorption Costing

Can someone please help me to understand this?

Last year, Blake Company's income under absorption costing was $3,600 lower than its income under variable costing. The company sold 10,000 units during the year, and its total variable costs were $9 per unit, of which $1 was variable selling expense. If total production costs were $11 per unit under absorption costing, then how many units did the company produce during the year?

| 11,200 units produced |

| 10,000 units produced |

| 8,800 units produced-This Answer is Correct |

| 1,200 units produced |

Absorption net income is $3,600 lower, which means that ending inventory decreased and sales were greater than production. To calculate fixed overhead cost per unit, subtract variable production cost per unit from total production cost per unit. Remember that $1 of the total variable costs per unit is variable selling expense. Hence, total variable production costs per unit is $8 ($9 − $1). To compute fixed production costs per unit, subtract the variable cost from the total cost to get $3 per unit ($11 − $8).

The difference between absorption costing and variable costing can then be divided by the fixed overhead cost per unit to determine the decrease in inventory: $3,600 ÷ $3 = 1,200 units.

To calculate the units produced during the year, subtract the decrease in inventory from the total units sold during the year: 10,000 – 1,200 units = 8,800 units produced.

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Tejas Doke

Accountant

Dombivli MH

India

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