# -23 Variable and absorption costing, explaining...

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9-23 Variable and absorption costing, explaining operating-income differences. EntertainMe Corporation manufactures and sells 50-inch television sets and uses standard costing. Actual data relating to January, February, and March 2017 are as follows: January February March Unit data: Beginning inventory 0 150 150 Production 1,500 1,400 1,520 Sales 1,350 1,400 1,530 Variable costs: Manufacturing cost per unit produced \$ 1,000 \$ 1,000 1,00 0 Operating (marketing) cost per unit sold \$ 800 \$ 800 800 Fixed costs: Manufacturing costs \$525,00 0 \$525,000 \$525,0 00 Operating (marketing) costs \$130,00 0 \$130,000 \$130,0 00 The selling price per unit is \$3,300. The budgeted level of production used to calculate the budgeted fixed manufacturing cost per unit is 1,500 units. There are no price, efficiency, or spending variances. Any production-volume variance is written off to cost of goods sold in the month in which it occurs. 1. Prepare income statements for EntertainMe in January, February, and March 2017 under (a) variable costing and (b) absorption costing. 2. Explain the difference in operating income for January, February, and March under variable costing and absorption costing. \$ \$ SOLUTION (40 min.) Variable and absorption costing, explaining operating-income differences. 1. Key inputs for income statement computations are: January February March
Beginning inventory Production Goods available for sale Units sold Ending inventory 0 1 ,500 1,500 1 ,350 150 150 1 ,400 1,550 1 ,400 150 150 1 ,520 1,670 1 ,530 140 The budgeted fixed manufacturing cost per unit and budgeted total manufacturing cost per unit under absorption costing are: January February March (a) Budgeted fixed manufacturing costs (b) Budgeted production (c)=(a)÷(b) Budgeted fixed manufacturing cost per unit (d) Budgeted variable manufacturing cost per unit (e)=(c)+(d) Budgeted total manufacturing cost per unit \$525,000 1,500 \$350 \$1,000 \$1,350 \$525,000 1,500 \$350 \$1,000 \$1,350 \$525,000 1,500 \$350 \$1,000 \$1,350
(a) Variable Costing January 2017 February 2017 March 2017 Revenues a \$4,455,000 \$4,620,000 \$5,049,000 Variable costs Beginning inventory b \$ 0 \$ 150,000 \$ 150,000 Variable manufacturing costs c 1 ,500,000 1 ,400,000 1 ,520,000 Cost of goods available for sale Deduct ending inventory d 1,500,000 (150,000) 1,550,000 (150 ,000) 1,670,000 (140,000) Variable cost of goods sold Variable operating costs e Total variable costs 1,350,000 1 ,080,000 2 ,430,000 1,400,000 1 ,120,000 2 ,520,000 1,530,000 1,224 ,000 2 ,754,000 Contribution margin Fixed costs Fixed manufacturing costs Fixed operating costs Total fixed costs Operating income 525,000 130 ,000 2,025,000 655 ,000 \$1 ,370,000 525,000 130 ,000 2,100,000 655 ,000 \$1 ,445,000 525,000 130 ,000 2,295,000 655 ,000 \$1 ,640,000 a \$3,300 × 1,350; \$3,300 × 1,400; \$3,300 × 1,530 b \$? × 0; \$1,000 × 150; \$1,000 × 150 c \$1,000 × 1,500; \$1,000 × 1,400; \$1,000 × 1,520 d \$1,000 × 150; \$1,000 × 150; \$1,000 × 140 e \$800 × 1,350; \$800 × 1,400; \$800 × 1,530
(b) Absorption Costing January 2017 February 2017 March 2017 Revenues a Cost of goods sold Beginning inventory b \$ 0 \$4,455,000 \$ 202,500 \$4,620,000 \$ 202,500 \$5,049,000 Variable manufacturing costs c 1,500,000 1,400,000 1,520,000 Allocated fixed manufacturing costs d 525 ,000 490 ,000 532 ,000 Cost of goods available for sale 2,025,000 2,092,500 2,254,500 Deduct ending inventory e (202,500) (202,500) (189,000) Adjustment for prod. vol. var. f 0 35 ,000 U (7 ,000) F Cost of goods sold 1,822,500 1 ,925,000 2 ,058,500 Gross margin 2,632,500 2,695,000 2,990,500 Operating costs Variable operating costs g 1,080,000 1,120,000 1,224,000 Fixed operating costs 130 ,000 130 ,000 130 ,000 Total operating costs 1 ,210,000 1,250,000 1 ,354,000 Operating income \$1 ,422,500 \$1 ,445,000 \$1 ,636,500 a \$3,300 × 1,350; \$3,300 × 1,400; \$3,300 × 1,530 b \$? × 0; \$1,350 × 150; \$1,350 × 150 c \$1,000 × 1,500; \$1,000 × 1,400; \$1,000 × 1,520 d \$350 × 1,500; \$350 × 1,400; \$350 × 1,520 e \$1,350 × 150; \$1,350 × 150; \$1,350 × 140 f \$525,000 – \$525,000; \$525,000 – \$490,000; \$525,000 – \$532,000 g \$800 × 1,350; \$800 × 1,400; \$800 × 1,530
2. = January: \$1,422,500 – \$1,370,000 = (\$350   × 150) – \$0 \$52,500 = \$52,500 February: \$1,445,000 – \$1,445,000 = (\$350 × 150) – (\$350 × 150) \$0 = \$0 March: \$1,636,500 – \$1,640,000 =