Variable versus absorption costing Colorado Business Tools, manufactures calculators. Costs incurred in making 9,500 calculators in February included 29,450 of fixed manufacturing overhead. The total absorption cost per calculator was $10.25. Required:

a. Calculate the variable cost per calculator.

b. The ending inventory of pocket calculators was 750 units higher at the end of the month than at the beginning of the month. By how much and in what direction (higher or lower) would operating income for the month of February be different under variable costing than under absorption costing?

c. Express the pocket calculator cost in a cost formula.

Variable cost per unit = 7.15

Difference in profit = $2,325

Cost formula : Y =    3.1 + 7.15X

Explanation:

Variable cost per calculator =Full cost - Fixed cost per unit

Full cost= $10.25

Fixed cost per unit = Total fixed costs / Number of units

                          = $29,450/9,500 units= 3.1

Variable cost per calculator = $10.25 -  3.1  = 7.15

Difference in profit = OAR (fixed cost per unit)× change in inventory

                             = 3.1 × 750 = $2,325

The absorption costing profit would be higher if there is an increase in increase at the end of the period and vice versa. Hence , an increase in inventory by  750 units would mean that absorption costing profit is higher by $2,325

Cost of calculator

Y = a +bx

Y =    3.1 + 7.15X

Y- total cost per unit

Fixed cost per unit = 3.1

Variable cost per unit = 7.15

Variable cost per unit = 7.15

Difference in profit = $2,325

Cost formula : Y =    3.1 + 7.15X

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