Variable costing net operating income 13600 add fixed

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Intermediate Accounting: Reporting and Analysis
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Chapter 7 / Exercise E7-1
Intermediate Accounting: Reporting and Analysis
Jones/Wahlen
Expert Verified
Variable costing net operating income ............................ $13,600 Add fixed manufacturing overhead costs deferred in inventory under absorption costing ............................. 11,200 Absorption costing net operating income ........................ $24,800
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Intermediate Accounting: Reporting and Analysis
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Chapter 7 / Exercise E7-1
Intermediate Accounting: Reporting and Analysis
Jones/Wahlen
Expert Verified
Chapter 7 Variable Costing: A Tool for Management 378 Garrison, Managerial Accounting, 12th Edition 144. Duif Company's absorption costing income statements for the last two years are presented below: Year 1 Year 2 Sales ....................................................................... $70,000 $90,000 Less cost of goods sold: Beginning inventory ........................................... 0 6,000 Add cost of goods manufactured ........................ 48,000 48,000 Goods available for sale ..................................... 48,000 54,000 Less ending inventory ........................................ 6,000 0 Cost of goods sold ................................................. 42,000 54,000 Gross margin ......................................................... 28,000 36,000 Less selling & admin. expenses ............................ 25,000 31,000 Net operating income ............................................ $ 3,000 $ 5,000 Data on units produced and sold in each of these years are given below: Year 1 Year 2 Units in beginning inventory ................................. 0 1,000 Units produced ...................................................... 8,000 8,000 Units sold ............................................................... 7,000 9,000 Fixed factory overhead totaled $16,000 in each year. This overhead was applied to products at a rate of $2 per unit. Variable selling and administrative expenses were $3 per unit sold. Required: a. Compute the unit product cost in each year under variable costing. b. Prepare new income statements for each year using variable costing. c. Reconcile the absorption costing and variable costing net operating income for each year. Level: Medium LO: 1,2,3
Chapter 7 Variable Costing: A Tool for Management Garrison, Managerial Accounting, 12th Edition 379 Answer: a. The unit product cost under variable costing can be determined by subtracting the fixed factory overhead rate per unit from the unit product cost under absorption costing. Cost of goods sold, Year 1 .................................... $42,000 Divided by number of units sold ........................... ÷ 7,000 units Absorption costing unit product cost ..................... $6 per unit Absorption costing unit product cost ..................... $6 Less fixed portion .................................................. 2 Variable costing unit product cost ......................... $4 b. Year 1 Year 2 Sales .......................................................................... $70,000 $90,000 Less variable expenses: Variable cost of goods sold: Beginning inventory ........................................... 0 4,000 Add variable manufacturing costs @ $4 ............ 32,000 32,000 Goods available for sale ..................................... 32,000 36,000 Less ending inventory @ $4 ............................... 4,000 0 Variable cost of goods sold ................................... 28,000 36,000 Variable selling and administrative @ $3 ............. 21,000 27,000 Total variable expenses ............................................. 49,000 63,000 Contribution margin .................................................. 21,000 27,000 Less fixed expenses: Factory overhead ................................................... 16,000 16,000 Selling and administrative* ................................... 4,000 4,000 Total fixed expenses ................................................. 20,000 20,000 Net operating income ................................................ $ 1,000 $ 7,000 * Year 1: $25,000 – $3 × 7,000 = $4,000 c. Year 1 Year 2 Variable costing net operating income ................................. $1,000 $7,000 Add fixed factory overhead deferred in inventory under absorption costing (1,000 units × $2 per unit) .................. 2,000 Less fixed factory overhead released from inventory under absorption costing (1,000 units × $2 per unit) .................. (2,000) Absorption costing net operating income ............................. $3,000 $5,000
Chapter 7 Variable Costing: A Tool for Management 380 Garrison, Managerial Accounting, 12th Edition 145. Hanks Company produces a single product. Operating data for the company and its absorption costing income statements for the last two years are presented below: Year 1 Year 2 Units in beginning inventory ................................. 0 1,000 Units produced ...................................................... 9,000 9,000 Units sold ............................................................... 8,000 10,000 Year 1 Year 2 Sales ....................................................................... $80,000 $100,000 Less cost of goods sold: Beginning inventory ........................................... 0 6,000 Add cost of goods manufactured ........................ 54,000 54,000 Goods available for sale ..................................... 54,000 60,000 Less ending inventory ........................................ 6,000 0 Cost of goods sold ................................................. 48,000 60,000 Gross margin ......................................................... 32,000 40,000 Less selling & admin. expenses ............................ 28,000 30,000

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