Concept explainers
1.(A)
Absorption Costing
Absorption costing is compulsory under Generally Accepted Accounting Principles (GAAP) for financial statements circulated to the external users. Under absorption costing, the cost of goods manufactured includes direct materials, direct labor, and factory overhead costs. Fixed factory overhead and variable factory overhead are included as part of factory overhead.
Variable Costing
Managers frequently use variable costing for internal purposes for taking decision making. The cost of goods manufactured includes direct materials, direct labor, and variable factory overhead. Fixed factory overhead is treated as period (fixed) expense.
The income statement according to the absorption costing concept of the Company WC for the month of July.
1.(A)
Answer to Problem 3PA
Calculate the income statement according to the absorption costing concept of the Company WC as shown below:
Company WC | ||
Absorption costing income statement for the month ended | ||
July 31 | ||
Particulars | $ | $ |
Sales | 4,320,000 | |
Less: Cost of goods sold | ||
Cost of goods manufactured | 3,600,000 | |
Inventory on July, 31
|
(360,000) | |
Total cost of goods sold | 3,240,000 | |
Gross profit | 1,080,000 | |
Less: Selling and administrative expenses | 169,000 | |
Income from operations | 911,000 |
Table (1)
Explanation of Solution
Working notes:
1. Calculate the value of ending inventory per unit.
Therefore, income from operations under absorption costing concept of Company WC for the month ended July 31 is $911,000.
2.(A)
The income statement according to the variable cost concept of the Company WC for the month ended July, 31.
2.(A)
Answer to Problem 3PA
Calculate the income statement according to the variable costing concept of the Company WC as shown below:
Company WC | ||
Variable costing income statement for the month ended | ||
July 31 | ||
Particulars | $ | $ |
Sales | 4,320,000 | |
Less: Variable cost of goods sold | ||
Variable cost of goods manufactured | 3,280,000 | |
Inventory on July, 31
|
(328,000) | |
Total variable cost of goods sold | 2,952,000 | |
Manufacturing margin | 1,368,000 | |
Less: Variable selling and administrative expenses | 144,000 | |
Contribution margin | 1,224,000 | |
Less: Fixed costs | ||
Fixed manufacturing costs | 320,000 | |
Fixed selling and administrative expenses | 25,000 | |
Total fixed cost | 345,000 | |
Income from operations | 879,000 |
Table (3)
Explanation of Solution
Working note:
1. Calculate the value of ending inventory per unit.
Therefore, income from operations under variable costing concept of Company WC for the month ended July, 31 is $879,000.
3.(A)
To Identify: The reason for the difference between the amount of income from operations reported in absorption costing income statement and variable costing income statement for the month ended July, 31.
3.(A)
Explanation of Solution
The difference between the absorption and variable costing income from operations of $32,000
Increase in inventory = 8,000 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.
4.
To discuss: Which month Company WC operates more profitability.
4.
Explanation of Solution
Based on variable costing concept, the company WC was equally profitable in July and August. Sales and variable cost per unit were the same for both the month and under both concept. The combined income from operations reported based on absorption concept for July and August
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