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Pinellas Pillow Company - Costing Method

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Pinellas Pillow Company's planned production for the year ended was 10,000 units. This production level was achieved, but only 9,000 units were sold.

Direct material used $80,000
Direct labor incurred $40,000
Fixed manufacturing overhead $50,000
Variable manufacturing overhead $24,000
Fixed selling and administrative expenses $60,000
Variable selling and administrative expenses $9,000
Finished-goods inventory, Jan 1 None

There were no work-in-process inventories at the beg or end of the year.

1. What would be Pinellas Pillow Company's finished-goods inventory cost on Dec. 31 under the variable-costing method?

2. Which costing method, absorption or variable costing, would show a higher operating income for the year? By what amount?

3. Suppose Pinellas Pillow Company uses throughput costing, and direct material is its only unit level cost. What would be Pinellas' finished-goods inventory on Dec. 31?

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Solution Summary

This solution is comprised of a detailed explanation to find which costing method, absorption or variable costing would show a higher operating income for the year.

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1. What would be Pinellas Pillow Company's finished-goods inventory cost on Dec. 31 under the variable-costing method?

First, we need to compute the unit product cost under both absorption and variable costing.

Absorption costing

Direct materials ($80,000/10,000 units) 8.0
Direct labor ($40,000/10,000 units) 4.0
Variable manufacturing overhead ($24,000/10,000 units) 2.4
Fixed manufacturing ...

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