Absorption and Variable Costing Income Statements During the first month of oper
ID: 2466939 • Letter: A
Question
Absorption and Variable Costing Income Statements
During the first month of operations ended May 31, 2014, Dorm Fridge Company manufactured 10,100 microwaves, of which 9,500 were sold. Operating data for the month are summarized as follows:
Required:
1. Prepare an income statement based on the absorption costing concept.
Dorm Fridge Company
Absorption Costing Income Statement
For the Month Ended May 31, 2014
$
Cost of goods sold:
$
$
$
Hide Feedback
Partially Correct
Check My Work Feedback
1. Sales - (cost of goods manufactured - ending inventory*) = Gross profit; gross profit - selling and administrative expenses = income from operations.
* (Manufactured Units - Sold units) x (total manufacturing costs/manufactured units)
Learning Objective 1 and Learning Objective 2.
2. Prepare an income statement based on the variable costing concept.
Dorm Fridge Company
Variable Costing Income Statement
For the Month Ended May 31, 2014
$
Variable cost of goods sold:
$
$
$
Fixed costs:
$
$
Hide Feedback
Partially Correct
Check My Work Feedback
2. Sales - variable cost of goods sold* = Manufacturing margin; Manufacturing margin - variable selling and administrative expenses = Contribution margin; Contribution margin - (fixed manufacturing costs + fixed selling and administrative expenses) = income from operations.
*Variable cost of goods sold = Variable cost of goods manufactured - [(Manufactured Units - Sold units) x (variable manufacturing costs/manufactured units)]
Learning Objective 1 and Learning Objective 2.
Hint(s)
3. The income from operations reported under SelectabsorptionvariableCorrect 1 of Item 3 costing exceeds the income from operations reported under SelectabsorptionvariableCorrect 2 of Item 3 costing by the difference between the two, due to SelectfixedvariableCorrect 3 of Item 3 manufacturing costs that are deferred to a future month under SelectabsorptionvariableCorrect 4 of Item 3 costing.
Hide Feedback
Correct
Check My Work Feedback
3. Recall that fixed factory overhead costs are considered a period expense under variable costing.
Learning Objective 1 and Learning Objective 2.
Sales $1,187,500 Manufacturing costs: Direct materials $595,900 Direct labor 181,800 Variable manufacturing cost 151,500 Fixed manufacturing cost 80,800 1,010,000 Selling and administrative expenses: Variable $95,000 Fixed 43,700 138,700Explanation / Answer
Answer:
1)
Income Statement under Absorption Costing
Under Absorption Costing, Fixed Manufacturing Costs are treated as part of production cost. Under Absorption costing, closing stock is valued at manufacturing cost of production and manufacturing cost of production includes Variable Manufacturing costs as well as fixed manufacturing cost.
Dorm Fridge Company
Absorption Costing Income Statement
For the Month Ended May 31, 2014
Sales
$1,187,500
Cost of Goods Sold:
Direct materials
$595,900
Direct labor
$181,800
Variable manufacturing cost
$151,500
Fixed manufacturing cost
$80,800
Cost of Production
$1,010,000
Add: Beginning Inventory
0
Less: Ending Inventory (note 1)
($60,000)
Cost of Goods Sold
$950,000
Gross Margin (Sales - Cost of Goods Sold)
$237,500
Selling and administrative expenses:
Variable
$95,000
Fixed
$43,700
Total Selling and administrative expenses
$138,700
Net Operating Profit (Gross Profit - S&A expenses)
$98,800
Note 1 --- Value of Ending Inventory = Cost of Production / Units Produced x Ending Inventory Units = $1,010,000 / 10,100 x 600 = $60,000
2)
Income Statement under Variable Costing
Some interesting facts/information about variable costing:--
Under Variable Costing, the variable costs as direct material, direct labor and variable manufacturing overheads are treated as the cost of product. The value of finished goods and work–in–progress is also comprised only of variable costs. Variable selling and distribution are excluded for valuing these inventories. Fixed costs are not considered for valuation of closing stock of finished goods and closing WIP. Fixed costs are treated as period costs and are charged to profit and loss account for the period for which they are incurred.
Dorm Fridge Company
Variable Costing Income Statement
For the Month Ended May 31, 2014
Sales
$1,187,500
Variable Cost of Goods Sold
Direct materials
$595,900
Direct labor
$181,800
Variable manufacturing cost
$151,500
Variable Cost of Production
$929,200
Add: Beginning Inventory
0
Less: Ending Inventory (note 2)
($55,200)
Variable Cost of Goods Sold
$874,000
Variable Selling and administrative expenses
$95,000
Total Variable Costs
$969,000
Contribution Margin (Sales - Total Variable Cost)
$218,500
Fixed Costs
Fixed manufacturing cost
$80,800
Fixed Selling and administrative expenses:
$43,700
Total Fixed Costs
$124,500
Net Operating Profit (Contribution - Fixed Cost)
$94,000
Note 2 – Value of Ending Inventory = Variable Cost of Production / Produced Units x Ending Inventory Units = $929,200 / 10,100 x 600 = $55,200
Dorm Fridge Company
Absorption Costing Income Statement
For the Month Ended May 31, 2014
Sales
$1,187,500
Cost of Goods Sold:
Direct materials
$595,900
Direct labor
$181,800
Variable manufacturing cost
$151,500
Fixed manufacturing cost
$80,800
Cost of Production
$1,010,000
Add: Beginning Inventory
0
Less: Ending Inventory (note 1)
($60,000)
Cost of Goods Sold
$950,000
Gross Margin (Sales - Cost of Goods Sold)
$237,500
Selling and administrative expenses:
Variable
$95,000
Fixed
$43,700
Total Selling and administrative expenses
$138,700
Net Operating Profit (Gross Profit - S&A expenses)
$98,800