Absorption and Variable Costing Income Statements During the first month of oper
ID: 2515978 • Letter: A
Question
Absorption and Variable Costing Income Statements
During the first month of operations ended May 31, 2014, Dorm Fridge Company manufactured 10,500 microwaves, of which 9,800 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:
$
$
$
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:
$
$
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 3manufacturing costs that are deferred to a future month under SelectabsorptionvariableCorrect 4 of Item 3 costing.
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Problem 20-1 (Algorithmic)
Sales $1,470,000 Manufacturing costs: Direct materials $745,500 Direct labor 220,500 Variable manufacturing cost 189,000 Fixed manufacturing cost 94,500 1,249,500 Selling and administrative expenses: Variable $117,600 Fixed 54,100 171,700Explanation / Answer
Answer:
1
DORM FRIDGE COMPANY
Absorption Costing Income Statement
For the Month Ended May 31, 2014
Sales
1,470,000
Cost of goods sold:
Cost of goods manufactured
1249500
Less inventory, May 31
(700 units × $119)(w.N-1)
-83300
Cost of goods sold
1166200
Gross profit
303,800
Selling and administrative expenses
171700
Income from operations
132,100
Working note
Calculation for cost of goods sold per unit
=1249500/10500
=119
_________________________________________
2
DORM FRIDGE COMPANY
Variable Costing Income Statement
For the Month Ended May 31, 2014
Sales
1,470,000
Variable cost of goods sold:
Variable cost of goods manufactured
1155000
Less inventory, May 31
(700 × $110)
-77000
Variable cost of goods sold
1078000
Manufacturing margin
392,000
Variable selling and administrative expenses
117600
Contribution margin
274,400
Fixed costs:
Fixed manufacturing costs
94500
Fixed selling and administrative expenses
54100
148600
Income from operations
125,800
Working note
Calculation for cost of goods sold per unit
=(1249500-94500)/10500
=110
3
The income from operations reported under absorption costing exceeds the income from operations reported under variable costing by $6300 ($132100-125800). This $6300 is due to including $6300 of fixed manufacturing cost in inventory under absorption costing [700 units × 9 ($94,500/10,500)]. The $6300 was thus deferred to a future month under absorption costing, while it was included as an expense of May (part of fixed costs) under variable costing
DORM FRIDGE COMPANY
Absorption Costing Income Statement
For the Month Ended May 31, 2014
Sales
1,470,000
Cost of goods sold:
Cost of goods manufactured
1249500
Less inventory, May 31
(700 units × $119)(w.N-1)
-83300
Cost of goods sold
1166200
Gross profit
303,800
Selling and administrative expenses
171700
Income from operations
132,100