Net operating income under Variable costing system and Absorption costing method:
Variable Costing is a costing method which comprises of only variable
Absorption Costing is different from variable costing. It comprises of direct materials, direct labors and both variable and fixed manufacturing overhead. Thus in absorption costing all of the manufacturing costs is absorbed by the units produced.
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Operating income we get by reducing the fixed expenses from the contribution margin.
If the company produces 5000 fewer units than it sells in the second year of operations, will absorption costing net operating income be higher or lower than variable costing net operating income in year 2.
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Introduction To Managerial Accounting
- Kildeer Company makes easels for artists. During the last calendar year, a total of 30,000 easels were made, and 31,000 were sold for 52 each. The actual unit cost is as follows: The selling expenses consisted of a commission of 1.30 per unit sold and advertising copayments totaling 95,000. Administrative expenses, all fixed, equaled 183,000. There were no beginning and ending work-in-process inventories. Beginning finished goods inventory was 132,600 for 3,400 easels. Required: 1. Calculate the number and the dollar value of easels in ending finished goods inventory. 2. Prepare a cost of goods sold statement. 3. Prepare an absorption-costing income statement. Add a column for percentage of sales.arrow_forwardEllerson Company provided the following information for the last calendar year: During the year, direct materials purchases amounted to 278,000, direct labor cost was 189,000, and overhead cost was 523,000. During the year, 100,000 units were completed. Refer to Exercise 2.21. Last calendar year, Ellerson recognized revenue of 1,312,000 and had selling and administrative expenses of 204,600. Required: 1. What is the cost of goods sold for last year? 2. Prepare an income statement for Ellerson for last year.arrow_forwardOakes Inc. manufactured 40,000 gallons of Mononate and 60,000 gallons of Beracyl in a joint production process, incurring 250,000 of joint costs. Oakes allocates joint costs based on the physical volume of each product produced. Mononate and Beracyl can each be sold at the split-off point in a semifinished state or, alternatively, processed further. Additional data about the two products are as follows: An assistant in the companys cost accounting department was overheard saying ...that when both joint and separable costs are considered, the firm has no business processing either product beyond the split-off point. The extra revenue is simply not worth the effort. Which of the following strategies should be recommended for Oakes?arrow_forward
- Columbia Products Inc. has two divisions, Salem and Seaside. For the month ended March 31, Salem had sales and variable costs of 500,000 and 225,000, respectively, and Seaside had sales and variable costs of 800,000 and 475,000, respectively. Salem had direct fixed production and administrative expenses of 60,000 and 35,000, respectively, and Seaside had direct fixed production and administrative expenses of 80,000 and 45,000, respectively. Fixed costs that were common to both divisions and couldnt be allocated to the divisions in any meaningful way were selling, 33,000, and administration, 27,000. Prepare a segmented income statement by division for March.arrow_forwardPetrillo Company produces engine parts for large motors. The company uses a standard cost system for production costing and control. The standard cost sheet for one of its higher volume products (a valve) is as follows: During the year, Petrillo had the following activity related to valve production: a. Production of valves totaled 20,600 units. b. A total of 135,400 pounds of direct materials was purchased at 5.36 per pound. c. There were 10,000 pounds of direct materials in beginning inventory (carried at 5.40 per pound). There was no ending inventory. d. The company used 36,500 direct labor hours at a total cost of 656,270. e. Actual fixed overhead totaled 110,000. f. Actual variable overhead totaled 168,000. Petrillo produces all of its valves in a single plant. Normal activity is 20,000 units per year. Standard overhead rates are computed based on normal activity measured in standard direct labor hours. Required: 1. Compute the direct materials price and usage variances. 2. Compute the direct labor rate and efficiency variances. 3. Compute overhead variances using a two-variance analysis. 4. Compute overhead variances using a four-variance analysis. 5. Assume that the purchasing agent for the valve plant purchased a lower-quality direct material from a new supplier. Would you recommend that the company continue to use this cheaper direct material? If so, what standards would likely need revision to reflect this decision? Assume that the end products quality is not significantly affected. 6. Prepare all possible journal entries (assuming a four-variance analysis of overhead variances).arrow_forwardUse the following information for Brief Exercise: Morning Smiles Coffee Company manufactures Stoneware French Press coffee makers and sold 8,000 coffee makers during the month of March at a total cost of 612,500. Each coffee maker sold at a price of 100. Morning Smiles also incurred two types of selling costs: commissions equal to 5% of the sales price and other selling expense of 45,000. Administrative expense totaled 47,500. 2-33 Income Statement Percentages Refer to the information for Morning Smiles Coffee Company on the previous page. Required: Prepare an income statement for Morning Smiles for the month of March and calculate the percentage of sales revenue represented by each line of the income statement. (Note: Round answers to one decimal place.)arrow_forward
- Last year, Orsen Company produced 25,000 juicers and sold 26,500 juicers for 60 each. The actual variable unit cost is as follows: Fixed overhead was 320,000. Fixed selling expenses consisted of advertising copayments totaling 110,000. Fixed administrative expenses were 236,000. There were no beginning and ending work-in-process inventories. Beginning finished goods inventory was 148,000 for 4,000 juicers. The value of ending inventory reported on the financial statements was a. 55,500 b. 92,500 c. 66,500 d. 39,900arrow_forwardZippy Inc. manufactures a fuel additive, Surge, which has a stable selling price of 44 per drum. The company has been producing and selling 80,000 drums per month. In connection with your examination of Zippys financial statements for the year ended September 30, management has asked you to review some computations made by Zippys cost accountant. Your working papers disclose the following about the companys operations: Standard costs per drum of product manufactured: Materials: Costs and expenses during September: Chemicals: 645,000 gallons purchased at a cost of 1,140,000; 600,000 gallons used. Empty drums: 94,000 purchased at a cost of 94,000; 80,000 drums used. Direct labor: 81,000 hours worked at a cost of 816,480. Factory overhead: 768,000. Required: Calculate the following for September, using the formulas on pages 421422 and 424 (Round unit costs to the nearest whole cent and compute the materials variances for both Surge and for the drums.): 1. Materials quantity variance. 2. Materials purchase price variance. 3. Labor efficiency variance. 4. Labor rate variance.arrow_forwardFor each of the following independent situations, calculate the missing values: 1. The Belen plant purchased 78,300 of direct materials during June. Beginning direct materials inventory was 2,500, and direct materials used in production were 73,500. What is ending direct materials inventory? 2. Forster Company produced 14,000 units at an average cost of 5.90 each. The beginning inventory of finished goods was 3,422. (The average unit cost was 5.90.) Forster sold 14,120 units. How many units remain in ending finished goods inventory? 3. Beginning work in process (WIP) was 116,000, and ending WIP was 117,300. If total manufacturing costs were 349,000, what was the cost of goods manufactured? 4. If the conversion cost is 84 per unit, the prime cost is 55, and the manufacturing cost per unit is 105, what is the direct materials cost per unit? 5. Total manufacturing costs for August were 412,000. Prime cost was 64,000, and beginning WIP was 76,000. The cost of goods manufactured was 434,000. Calculate the cost of overhead for August and the cost of ending WIP.arrow_forward
- Orinder Company provided the following information for the last calendar year: During the year, direct materials purchases amounted to 275,800, direct labor cost was 153,000, and overhead cost was 267,300. There were 25,000 units produced. Unit manufacturing cost (rounded to the nearest cent) is a. 28.40 b. 27.98 c. 34.95 d. 27.55arrow_forwardRoper Furniture manufactures office furniture and tracks cost data across their process. The following are some of the costs that they incur. Classify these costs as fixed or variable costs, and as product costs or period costs. Wood used to produce desks ($125,00 per desk) Production labor used to produce desks ($15 per hour) Production supervisor salary ($45,000 per year) Depreciation on factory equipment ($60,000 per year) Selling and administrative expenses ($45,000 per year) Rent on corporate office ($44,000 per year) Nails, glue, and other materials required to produce desks (varies per desk) Utilities expenses for production facility Sales staff commission (5% of gross sales)arrow_forwardOttis, Inc., uses 640,000 plastic housing units each year in its production of paper shredders. The cost of placing an order is 30. The cost of holding one unit of inventory for one year is 15.00. Currently, Ottis places 160 orders of 4,000 plastic housing units per year. Required: 1. Compute the economic order quantity. 2. Compute the ordering, carrying, and total costs for the EOQ. 3. How much money does using the EOQ policy save the company over the policy of purchasing 4,000 plastic housing units per order?arrow_forward
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