Absorption and Variable Costing Comparisons: Sales Exceed Production Wright Deve
ID: 2563297 • Letter: A
Question
Absorption and Variable Costing Comparisons: Sales Exceed Production
Wright Development purchases, develops, and sells commercial building sites. As the sites are sold, they are cleared at an average cost of $3,000 per site. Storm drains and driveways are also installed at an average cost of $5,500 per site. Selling costs are 10 percent of sales price. Administrative costs are $425,000 per year. During 2016, the company bought 1,000 acres of land for $5,000,000 and divided it into 200 sites of equal size. The average selling price per site was $90,000 during 2016 when 50 sites were sold. During 2017, the company purchased and developed another 1,000 acres, divided into 200 sites. The purchase price was again $5,000,000. Sales totaled 300 sites in 2017 at an average price of $90,000.
Required a. Prepare 2016 and 2017 functional income statements using absorption costing.
Use a negative sign only to indicate a net loss for income. Otherwise, do not use negative signs with your answers.
b. Prepare 2016 and 2017 contribution income statements using variable costing.
Use a negative sign only to indicate a net loss for income. Otherwise, do not use negative signs with your answers.
Wright Development Functional Income Statements For the Years 2016 and 2017 2016 2017 Sales $Answer $Answer Cost of sales Answer Answer Gross profit Answer Answer Selling and administrative expenses: Answer Answer Net income (loss) $Answer $AnswerExplanation / Answer
Working notes-
Calculation of cost per site
$25000
($5000000/200)
Nil.
Part 1 Income statements under absorption costing
Wright Development
Functional income statements
For the year 2016 and 2017
$4500000
($90000*50)
$27000000
($90000*300)
$450000
(10% * $4500000)
$2700000
($27000000*10%)
Part 2 Income statements under variable costing
Wright development
Contribution income statements
For the financial year 2016-2017
Particulars Cost per site under absorption costing method Cost per site under variable costing method Land cost$25000
($5000000/200)
Nil.
Clearing costs $3000 $3000 Storms and driveways cost for improvement $5500 $5500