(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.
Want to see more full solutions like this?
Chapter 20 Solutions
Bundle: Financial & Managerial Accounting, Loose-Leaf Version, 14th + CengageNOWv2, 2 terms Printed Access Card
- Income 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_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_forwardTotal and Unit Product Cost Martinez Manufacturing Inc. showed the following costs for last month: Last month, 4,000 units were produced and sold. Required: 1. Classify each of the costs as product cost or period cost. 2. What is the total product cost for last month? 3. What is the unit product cost for last month?arrow_forward
- Pattison Products, Inc., began operations in October and manufactured 40,000 units during the month with the following unit costs: Fixed overhead per unit = 280,000/40,000 units produced = 7. Total fixed factory overhead is 280,000 per month. During October, 38,400 units were sold at a price of 24, and fixed marketing and administrative expenses were 130,500. Required: 1. Calculate the cost of each unit using absorption costing. 2. How many units remain in ending inventory? What is the cost of ending inventory using absorption costing? 3. Prepare an absorption-costing income statement for Pattison Products, Inc., for the month of October. 4. What if November production was 40,000 units, costs were stable, and sales were 41,000 units? What is the cost of ending inventory? What is operating income for November?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: Sales $2,150,000 Manufacturing costs: Direct materials $960,000 Direct labor 420,000 Variable manufacturing cost 156,000 288,000 1,824,000 Fixed manufacturing cost Selling and administrative expenses: Variable $204,000 Fixed 96,000 300,000 Required: 1. Prepare an income statement based on the absorption costing concept.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: Line Item Description Amount Amount Sales $2,150,000 Manufacturing costs: Direct materials $960,000 Direct labor 420,000 Variable manufacturing cost 156,000 Fixed manufacturing cost 288,000 1,824,000 Selling and administrative expenses: Variable $204,000 Fixed 96,000 300,000 Required: Question Content Area 1. Prepare an income statement based on the absorption costing concept. YoSan Inc.Absorption Costing Income StatementFor the Month Ended July 31 Line Item Description Amount Amount Cost of goods sold: - Question Content Area 2. Prepare an income statement based on the variable costing concept.…arrow_forward
- Absorption 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: Line Item Description Amount Amount Sales $2,150,000 Manufacturing costs: Direct materials $960,000 Direct labor 420,000 Variable manufacturing cost 156,000 Fixed manufacturing cost 288,000 1,824,000 Selling and administrative expenses: Variable $204,000 Fixed 96,000 300,000 Required: Question Content Area 1. Prepare an income statement based on the absorption costing concept. YoSan Inc.Absorption Costing Income StatementFor the Month Ended July 31 Line Item Description Amount Amount - Cost of goods sold: $- Select - Question Content Area 2. Prepare an income statement…arrow_forwardAbsorption and Variable Costing Income Statements for Two Months and Analysis During the first month of operations ended July 31, Head Gear Inc. manufactured 29,300 hats, of which 27,800 were sold. Operating data for the month are summarized as follows: Sales $177,920 Manufacturing costs: Direct materials $105,480 Direct labor 29,300 Variable manufacturing cost 11,720 Fixed manufacturing cost 11,720 158,220 Selling and administrative expenses: Variable $8,340 Fixed 6,090 14,430 During August, Head Gear Inc. manufactured 26,300 hats and sold 27,800 hats. Operating data for August are summarized as follows: Sales $177,920 Manufacturing costs: Direct materials $94,680 Direct labor 26,300 Variable manufacturing cost 10,520 Fixed manufacturing cost 11,720 143,220 Selling and administrative expenses: Variable $8,340 Fixed 6,090 14,430 Required: 1a. Prepare income…arrow_forwardEstimated Income Statements, using Absorption and Variable Costing Prior to the first month of operations ending October 31, Marshall Inc. estimated the following operating results: Sales (30,400 x $106) $3,222,400 Manufacturing costs (30,400 units): Direct materials 1,939,520 Direct labor 459,040 Variable factory overhead 215,840 Fixed factory overhead 255,360 Fixed selling and administrative expenses 69,500 Variable selling and administrative expenses 84,000 The company is evaluating a proposal to manufacture 33,600 units instead of 30,400 units, thus creating an ending inventory of 3,200 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. 1. Prepare an estimated income statement, comparing operating results if 30,400 and 33,600 units are manufactured in the absorption costing format. If an amount box does…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: Sales (28,000 x $98) $2,744,000 Manufacturing costs (28,000 units): Direct materials 1,660,400 Direct labor 392,000 Variable factory overhead 184,800 Fixed factory overhead 218,400 Fixed selling and administrative expenses 59,400 Variable selling and administrative expenses 71,900 The company is evaluating a proposal to manufacture 31,200 units instead of 28,000 units, thus creating an ending inventory of 3,200 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.arrow_forwardEstimated Income Statements, using Absorption and Variable Costing Prior to the first month of operations ending October 31, Marshall Inc. estimated the following operating results: Sales (27,200 x $96) $2,611,200 Manufacturing costs (27,200 units): Direct materials 1,572,160 Direct labor 372,640 Variable factory overhead 174,080 Fixed factory overhead 206,720 Fixed selling and administrative expenses 56,200 Variable selling and administrative expenses 68,000 The company is evaluating a proposal to manufacture 30,400 units instead of 27,200 units, thus creating an ending inventory of 3,200 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. 1. Prepare an estimated income statement, comparing operating results if 27,200 and 30,400 units are manufactured in the absorption costing format. If an amount box does not require an entry leave it blank. Marshall…arrow_forwardEstimated Income Statements, using Absorption and Variable Costing Prior to the first month of operations ending October 31, Marshall Inc. estimated the following operating results: Sales (27,200 x $96) $2,611,200 Manufacturing costs (27,200 units): Direct materials 1,572,160 Direct labor 372,640 Variable factory overhead 174,080 Fixed factory overhead 206,720 Fixed selling and administrative expenses 56,200 Variable selling and administrative expenses 68,000 The company is evaluating a proposal to manufacture 30,400 units instead of 27,200 units, thus creating an ending inventory of 3,200 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. 1. Prepare an estimated income statement, comparing operating results if 27,200 and 30,400 units are manufactured in the absorption costing format. If an amount box does not…arrow_forward
- Managerial AccountingAccountingISBN:9781337912020Author:Carl Warren, Ph.d. Cma William B. TaylerPublisher:South-Western College PubManagerial Accounting: The Cornerstone of Busines...AccountingISBN:9781337115773Author:Maryanne M. Mowen, Don R. Hansen, Dan L. HeitgerPublisher:Cengage LearningCornerstones of Cost Management (Cornerstones Ser...AccountingISBN:9781305970663Author:Don R. Hansen, Maryanne M. MowenPublisher:Cengage Learning
- Principles of Cost AccountingAccountingISBN:9781305087408Author:Edward J. Vanderbeck, Maria R. MitchellPublisher:Cengage Learning