Managerial Accounting
Managerial Accounting
7th Edition
ISBN: 9781260247886
Author: Wild
Publisher: MCG
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Chapter 6, Problem 3E

1.

To determine

To prepare: Income statement of the company for the year using variable costing.

1.

Expert Solution
Check Mark

Explanation of Solution

    S. Company Income Statement (Variable Costing) For the year ended December 31, 2017
    Particulars Amount ($) Amount($)
    Sales ( 70,000×$350 ) 24,500,000
    Total Direct Material ( 70,000×40 ) (2,800,000)
    Total Direct Labor ( 70,000×60 ) (4,200,000)
    Variable Production Overheads (Working Note) (2,100,000)
    Variable Selling & Administrative Overheads ( 70,000×$30 ) (770,000) (9,870,000)
    Contribution Margin 14,630,000
    Fixed Production Overheads (7,000,000)
    Fixed Selling & Administrative Overheads (4,250,000) (11,250,000)
    Net Income 3,380,000
    Table (1)

The net income at the year ending Dec 31, 2017 under variable costing is $3,380,000.

Working Note:

The calculation of variable production overhead is,
Variable Overhead Production Cost=Number of Units×Variable Cost Per Unit

Where, number of units can be calculated as,
Number of Units=Opening Stock+ProductionClosing Stock =0+100,00030,000 =70,000

The calculation of variable cost per unit is,
Variable Overhead Per Unit= Annual Variable Overheads Units Produced = $3,000,000 100,000 =$30

Substitute 70,000 for number of units and $30 for variable overhead per unit in the above formula.
Variable Overhead Production Cost=70,000×$30 =$2,100,000

Thus, the net income at the year ending Dec 31, 2017 under variable costing is $3,380,000.

2.

To determine

To prepare: Income statement for the year using absorption costing.

2.

Expert Solution
Check Mark

Explanation of Solution

    S. Company Income Statement (Absorption Costing) For the year ended December 31, 2017
    Particulars Amount($) Amount($)
    Sales ( 70,000×$350 ) 24,500,000
    Cost of Goods Sold (Working Note) (14,000,000)
    Gross Margin 10,500,000
    Variable Selling & Administrative Overheads (770,000)
    Fixed Selling & Administrative Overheads (4,250,000) (5,020,000)
    Net Income 5,480,000
    Table (2)

The net income at the year ending Dec 31, 2017 under absorption costing is $5,480,000.

Working note:

Calculation of cost of goods sold is,
Cost of Goods Sold=Number of Units Sold×Cost Per Unit

Where, the cost per unit can be calculated as,

    Particulars Amount ($) Per Unit
    Direct Material 40
    Direct Labor 60
    Variable Overheads 30
    Fixed Overheads ( $7,000,000 1,00,000 ) 70
    Total Cost Per Unit 200
    Table (3)

Substitute 70,000 for number of units sold and $200 for cost per unit in the above formula.

    Cost of Goods Sold=70,000×$200 =14,000,000

Thus, the net income at the year ending Dec 31, 2017 under absorption costing is $5,480,000.

3.

To explain: The circumstances under which the reported income becomes identical under both absorption and variable costing.

  • When the closing stock of the firm becomes zero, the reported incomes under both absorption and variable costing become identical.
  • The only difference between the variable costing and absorption costing is the valuation of closing or ending inventory, so, whenever the value of ending inventory becomes equal or same, the incomes under both costing methods becomes identical.
  • Thus, the reported income becomes identical under both absorption and variable method when the values of closing inventory under both the methods become equal.

3.

To determine

To explain: The circumstances under which the reported income becomes identical under both absorption and variable costing.

3.

Expert Solution
Check Mark

Explanation of Solution

  • When the closing stock of the firm becomes zero, the reported incomes under both absorption and variable costing become identical.
  • The only difference between the variable costing and absorption costing is the valuation of closing or ending inventory, so, whenever the value of ending inventory becomes equal or same, the incomes under both costing methods becomes identical.
  • Thus, the reported income becomes identical under both absorption and variable method when the values of closing inventory under both the methods become equal.

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