(a)
Absorption Costing
Absorption costing is compulsory under Generally Accepted Accounting Principles (GAAP) for financial statements which are circulated to the external users. The cost of goods manufactured includes direct materials, direct labor, and factory overhead costs under absorption costing. Fixed factory overhead and variable factory overhead included as a part of factory overhead.
Variable Costing
Variable costing is the method that is used by the management (managers) for decision making purposes. The cost of goods manufactured includes direct materials, direct labor, and variable factory overhead. Fixed factory overhead is treated as period (fixed) expense.
To Determine: The income statement according to the absorption costing concept for the Y Incorporation.
(a)
Answer to Problem 20.1BPR
Calculate the income statement according to the absorption costing concept for the Y Incorporation as shown below:
Y Incorporation | ||
Absorption costing income statement | ||
for the month ended July, 31 | ||
Particulars | $ | $ |
Sales | 2,150,000 | |
Less: Cost of goods sold | ||
Cost of goods manufactured | 1,824,000 | |
Ending inventory (2) | (304,000) | |
Total cost of goods sold | 1,520,000 | |
Gross profit | 630,000 | |
Less: Selling and administrative expenses | 300,000 | |
Income from operations | 330,000 |
Table (1)
Explanation of Solution
Working notes:
1. Calculate the value of ending inventory per unit.
2. Calculate the value of ending inventory
Therefore, income from operations under absorption costing concept of Y Incorporation is $330,000.
(b)
The income statement according to the variable cost concept for the Y Incorporation.
(b)
Answer to Problem 20.1BPR
Calculate the income statement according to the variable costing concept for the Y Incorporation as shown below:
Y Incorporation | ||
Variable costing income statement | ||
for the month ended July, 31 | ||
Particulars | $ | $ |
Sales | 2,150,000 | |
Less: Variable cost of goods sold | ||
Variable cost of goods manufactured (3) | 1,536,000 | |
Ending inventory (5) | (256,000) | |
Total variable cost of goods sold | 1,280,000 | |
Manufacturing margin | 870,000 | |
Less: Variable selling and administrative expenses | 204,000 | |
Contribution margin | 666,000 | |
Less: Fixed costs | ||
Fixed manufacturing costs | 288,000 | |
Fixed selling and administrative expenses | 96,000 | |
Total fixed cost | 384,000 | |
Income from operations | 282,000 |
Table (2)
Explanation of Solution
Working note:
1. Calculate cost of goods manufactured
2. Calculate the value of ending inventory per unit.
3. Calculate the value of ending inventory
Therefore, income from operations under variable costing concept of Y Incorporation is $282,000.
(c)
To identify: The reason for the difference between in the amount of income from operations reported in absorption costing income statement and variable costing income statement.
(c)
Explanation of Solution
The difference between the absorption and variable costing income from operations of $48,000
Increase in inventory = 400 units
Fixed factory overhead per unit = $4
Under absorption costing method, the fixed
Under variable costing, all of the fixed factory overhead cost is subtracted in the period in which it is incurred, regardless of the amount of inventory change. Therefore, when inventory rises, the absorption costing income statement will have a higher income from operations than the variable costing income statement.
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Chapter 20 Solutions
FINANCIAL & MANAGERIAL ACCT LOOSE LEAF
- Appendix Absorption costing income statement On June 30, the end of the first month of operations, Tudor Manufacturing Co. prepared the following income statement, based on the variable existing concept: Sales (420,000 units) 7,450,000 Variable cost of goods sold: Variable cost of goods manufactured (500,000 units x 14 per unit) 7,000,000 Less ending inventory (80,000 units x 14 per unit) 1,120,000 Variable cost of goods sold 5,880,000 Manufacturing margin 1,570,000 Variable selling and administrative expenses 80,000 Contribution margin 1,490,000 Fixed costs: Fixed manufacturing costs 160,000 Fixed selling and administrative expenses 75,000 235,000 Income from operations 1,255,000 a. Prepare an absorption costing income statement. b. Reconcile the variable costing income from operations of 1,255,000 with the absorption costing income from operations determined in (a).arrow_forwardAbsorption and variable costing income statements During the first month of operations ended July 31, YoSan Inc. manufactured 2,400 flat panel televisions, of which 2,000 were sold. Operating data for the month are summarized as follows: Instructions 1. Prepare an income statement based on the absorption costing concept. 2. Prepare an income statement based on the variable costing concept. 3. Explain the reason for the difference in the amount of operating income reported in (1) and (2).arrow_forwardAppendix Absorption costing income statement On June 30, the end of the first month of operations, Tudor Manufacturing Co. prepared the following income statement, based on the variable existing concept: Sales (420,000 units) 7,450,000 Variable cost of goods sold: Variable cost of goods manufactured (500,000 units x 14 per unit) 7,000,000 Less ending inventory (80,000 units x 14 per unit) 1,120,000 Variable cost of goods sold 5,880,000 Manufacturing margin 1,570,000 Variable selling and administrative expenses 80,000 Contribution margin 1,490,000 Fixed costs: Fixed manufacturing costs 160,000 Fixed selling and administrative expenses 75,000 235,000 Income from operations 1,255,000 a. Prepare an absorption costing income statement. b. Reconcile the variable costing income from operations of 1,255,000 with the absorption costing income from operations determined in (a).arrow_forward
- Estimated income statements, using absorption and variable costing Prior to the first month of operations ending October 31, Marshall Inc. estimated the following operating results: The company is evaluating a proposal to manufacture 50,000 units instead of 40,000 units, thus creating an ending inventory of 10,000 units. Manufacturing the additional units will not change sales, unit variable factory overhead costs, total fixed factory overhead cost, or total selling and administrative expenses. a. Prepare an estimated income statement, comparing operating results if 40,000 and 50,000 units are manufactured in (1) the absorption costing format and (2) the variable costing format. b. What is the reason for the difference in operating income reported for the two levels of production by the absorption costing income statement?arrow_forwardIncome Statements under Absorption and Variable Costing In the coming year, Kalling Company expects to sell 28,700 units at 32 each. Kallings controller provided the following information for the coming year: Required: 1. Calculate the cost of one unit of product under absorption costing. 2. Calculate the cost of one unit of product under variable costing. 3. Calculate operating income under absorption costing for next year. 4. Calculate operating income under variable costing for next year.arrow_forward
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