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Chapter 20, Problem 20.1APR

(a)

To determine

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 included as a 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 treated as period (fixed) expense.

To Determine: The income statement according to the absorption costing concept for the Company FPF.

(a)

Expert Solution
Check Mark

Answer to Problem 20.1APR

Calculate the income statement according to the absorption costing concept for the Company FPF as shown below:

Company FPF
 Absorption costing income statement for the month ended
 May 31, 2016
 Particulars  $  $
 Sales     6,480,000
  Less: Cost of goods sold    
 Cost of goods manufactured    5,760,000  
 Ending inventory (2)    (576,000)  
 Total cost of goods sold       5,184,000
 Gross profit   1,296,000     
  Less: Selling and administrative expenses       936,000
 Income from operations          360,000

Table (1)

Explanation of Solution

Working notes:

  1. 1. Calculate the value of ending inventory per unit.

Ending inventory =Cost of goods manufacturedUnits manufactured=$5,760,00040,000 Units=$144per unit (1)

2. Calculate the value of ending inventory

Ending inventory = [Units manufactured ×Ending inventory rate per unit (1)]=4,000 Units×$144=$576,000 (2)

Conclusion

Therefore, income from operations under absorption costing concept of Company FPF is $360,000.

(b)

To determine

The income statement according to the variable cost concept for the Company FPF.

(b)

Expert Solution
Check Mark

Answer to Problem 20.1APR

Calculate the income statement according to the variable costing concept for the Company FPF as shown below:

Company FPF
 Variable costing income statement for the month ended
 May 31, 2016
 Particulars  $  $
 Sales     6,480,000
  Less: Variable cost of goods sold    
 Variable cost of goods manufactured (3)   5,200,000  
 Ending inventory (5)   (520,000)  
 Total variable cost of goods sold       4,680,000
 Manufacturing margin       1,800,000
 Less: Variable selling and administrative expenses       648,000
 Contribution margin       1,152,000
 Less: Fixed costs    
 Fixed manufacturing costs      560,000  
 Fixed selling and administrative expenses      288,000  
 Total fixed cost          848,000
 Income from operations          304,000

Table (2)

Explanation of Solution

Working notes:

1. Calculate cost of goods manufactured

Cost of goods manufactured = [Total manufacturing costFixed manufacturing cost]=$5,760,000$560,000=$5,200,000 (3)

2. Calculate the value of ending inventory per unit.

Ending inventory =Cost of goods manufacturedUnits manufactured=$5,200,00040,000 Units=$130per unit (4)

3. Calculate the value of ending inventory

Ending inventory = [Units manufactured ×Ending inventory rate per unit (4)]=4,000 Units×$130=$520,000 (5)

Conclusion

Therefore, income from operations under variable costing concept of Company FPF is $304,000.

(c)

To determine

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)

Expert Solution
Check Mark

Explanation of Solution

The difference between the absorption and variable costing income from operations of $56,000 ($360,000  $304,000) can be explained as follows:

Increase in inventory = 4,000 units (40,000 Units36,000 Units)

Fixed factory overhead per unit = $14 ($560,00040,000 Units)

Difference in income from operations)=(Increase in inventory×Fixed factory overhead per unit)=4,000units ×$14per unit=$56,000

Under absorption costing method, the fixed factory overhead cost included in the cost of goods sold is coordinated with the incomes. As an effect, 4,000 units that were produced, but unsold it includes fixed factory overhead cost, which is not involved in the cost of goods sold.

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 will the variable costing income statement.

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Chapter 20 Solutions

Bundle: Financial & Managerial Accounting, 13th + Working Papers, Volume 1, Chapters 1-15 For Warren/reeve/duchac’s Corporate Financial Accounting, ... 13th + Cengagenow™v2, 2 Terms Access Code

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