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Chapter 21: Q21-17E (page 1171)

Question: Preparing absorption costing income statements, production exceeds sales

Refer to Exercise E21-16.

Requirements:

  1. Prepare the April income statement using absorption costing.
  2. Determine the product cost per unit and the total cost of the 1,000 cases in Finished Goods Inventory as of April 30.
  3. Is the April 30 balance in Finished Goods Inventory higher or lower than variable costing? Explain why

Short Answer

Expert verified

Answer

  1. Operating income is $111,000
  2. The total unit product cost is $16 and the finished goods inventory is $16,000.
  3. Higher because unit product cost under absorption costing includes a fixed cost.

Step by step solution

01

Income statement using absorption costing (1)

Particulars

Amount

Net sales revenue ($29x12,000)

$348,000

Less: Cost of goods sold (($9+$7)x12,000)

$192,000

Gross profit

$156,000

Less: Selling and administrative cost

Variable selling and administrative cost ($3x12,000)

$36,000

Fixed selling and administrative cost

$9,000

Operating Income

$111,000

02

Calculation of product cost per unit and total cost of 1,000 cases in finished goods inventory as of April 30 (2).

Particulars

Amount

Variable manufacturing cost

$9

Fixed manufacturing cost ($91,000/13,000)

$7

Total unit product cost

$16

Finished goods inventory (1,000x$16)

$16,000

03

Difference between April 30 balance as per absorption and variable costing (3).

April 30 balance in Finished Goods Inventory is higher than variable costing because absorption costing includes fixed manufacturing overhead in total unit product cost.

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Most popular questions from this chapter

Computing variable costing contribution margin

Refer to your answers to Short Exercise S21-6. Product X sells for \(175 per unit. Assume no beginning inventories. Calculate the contribution margin using variable costing when Adamson:

  1. Produces and sells 2,000 units.
  2. Produces 2,500 units and sells 2,000 units
  3. Produces 5,000 units and sells 2,000 units.

S21-6 Direct materials \) 41 per unit Direct labor 57 per unit Variable manufacturing overhead 7 per unit Fixed manufacturing overhead 20,000 per year

Using variable costing, service company Refer to Exercise E21-25. The commercial business segment provided services to 200 customers. The residential business segment provided services to 400 customers. Determine the average amount Sherman Company charged each type of customer for services, the average variable cost per customer, and the average contribution margin per customer, rounded to two decimal places. What caused the difference in contribution margin in the two segments?

Analyzing profitability Refer to Short Exercise S21-10. Which business segment provided the greatest total contribution margin? Which

business segment had the highest contribution margin ratio?

Camden Company has divided its business into segments based on sales territories: East Coast, Midland, and West Coast. Following are financial data for 2018:

East Coast

Midland

West Coast

Units sold

71

69

53

Sales price per unit

\(10,300

\)13,600

$12,000

Variable cost per unit

6,283

7,072

7,080

: Before you begin this assignment, review the Tying It All Together feature in the chapter. CF Industries Holdings, Inc. is one of the largest manufacturers and distributors of nitrogen fertilizer and other nitrogen products in the world. The corporation often produces and stores large amounts of inventory during periods of low demand to ensure that there is enough product to meet the demand of peak seasons. Assume that one line of fertilizer (with no beginning Finished Goods Inventory) had the following data during a time period of low demand:

Sales price $ 20.00 per case Variable manufacturing costs 4.00 per case Fixed manufacturing costs 100,000 per quarter Variable selling and administrative costs 2.00 per case Fixed selling and administrative costs 45,000 per quarter Given that the time period has low demand, assume the company produced 1,000,000 cases but only sold 250,000 cases.

Requirement

1. Prepare the income statement for the quarter using variable costing.

2. Prepare the income statement for the quarter using absorption costing.

3. Why, if at all, is there a difference between operating income under the two methods?

How can variable costing be used in service companies?
See all solutions

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