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Chapter 21: Q2OE (page 1172)

Question: Preparing absorption costing income statements, production less than sales

Refer to Exercise E21-19.

Requirements

  1. Prepare the May income statement using absorption costing.
  2. Is operating income using absorption costing higher or lower than variable costing income? Explain why.
  3. Determine the balance in Finished Goods Inventory as of May 31.

Short Answer

Expert verified

Answer

  1. Operating income is $290,000
  2. Lower
  3. Finished goods inventory as of May 31 is 0.

Step by step solution

01

Income statement using absorption costing

Particulars

Amount

Variable manufacturing cost

$9

Fixed manufacturing overhead ($91,000/22,000)

$4

Total unit product cost

$13

Particulars

Amount

Net sales revenue ($29x23,000)

$667,000

Less: Cost of goods sold (($13x23,000)

$299,000

Gross profit

$368,000

Less: Selling and administrative cost

Variable selling and administrative cost ($3x23,000)

$69,000

Fixed selling and administrative cost

$9,000

Operating Income

$290,000

Particulars

Amount

Net sales revenue ($29*23,000)

$667,000

Less: Variable costs ($12*23,000)

$276,000

Contribution margin

$391,000

Less: Fixed costs

Fixed costs of goods sold

$91,000

Fixed selling and administrative cost

$9,000

Operating Income

$291,000

02

comparison between income using absorption and variable costing. 

Operating income using absorption costing is lower than variable costing income because under the absorption method cost of 1,000 beginning inventory is taken as $16,000.

03

Balance of finished goods inventory as of May 31.

EndingbalanceinFinishedGoodsInventory=Beginningbalance+UnitsProduced-Unitssold=1,000units+22,000units-23,000units=0units

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Most popular questions from this chapter

Using variable and absorption costing, making decisions The 2018 data that follow pertain to Eli’s Electric Eyewear, a manufacturer of swimming goggles. (Eli’s Electric Eyewear had no beginning Finished Goods Inventory in January 2018.)

Number of goggles produced 245,000 Number of goggles sold 215,000 Sales price per unit \( 22Variable manufacturing cost per unit 8Sales commission cost per unit 5Fixed manufacturing overhead 1,470,000 Fixed selling and administrative costs 250,000 Requirements

1. Prepare both conventional (absorption costing) and contribution margin (variable costing) income statements for Eli’s Electric Eyewear for the year ended December 31, 2018.

2. Which statement shows the higher operating income? Why?

3. Eli’s ElectricEyewear’s marketing vice president believes a new sales promotion that costs \)60,000 would increase sales to 220,000 goggles. Should the company go ahead with the promotion? Give your reasoning.

Using Excel for variable costing

Download an Excel template for this problem online in MyAccountingLab or athttp://www.pearsonhighered.com/Horngren. Tiger Mountain Gelato incurs thefollowing costs for its premium ice cream in May 2018:

Direct materials cost per pint $ 2.50 perpint

Direct labor cost per pint 0.75 per pint

Variable manufacturing overhead cost per pint 0.25 per pint

Fixed manufacturing overhead costs 6,000 per month

Total fixed selling and administrative costs 5,000 per month

Sales price per pint 8.00 per pint

Pints of gelato produced 12,000 pints

Pints of gelato sold 11,500 pints

There were no beginning inventories, so Tiger Mountain Gelato has 500 pintsin ending Finished Goods Inventory (12,000 pints produced less 11,500 pintssold).

Requirements

1. Calculate Tiger Mountain Gelato’s product cost per pint under absorptioncosting and variable costing.

2. Calculate the balance in Finished Goods Inventory on May 31, 2018, usingabsorption costing and variable costing.

3. Prepare income statements in good form for Tiger Mountain Gelato for May2018 using absorption costing and variable costing.

4. Reconcile the differences between operating incomes and Finished GoodsInventory balances between the two-costing method

Calculating gross profit and operating income, absorption costing Calculate the gross profit and operating income for June using absorption costing

Use the following information for Short Exercises S21-4 and S21-5.

Dracut Company reports the following information for June:

Net Sales Revenue $ 755,000 Variable Cost of Goods Sold 240,000 Fixed Cost of Goods Sold 198,000 Variable Selling and Administrative Costs 168,000 Fixed Selling and Administrative Costs 79,000

Explain why the fixed manufacturing overhead cost per unit changes when there is a change in the number of units produced.

Computing absorption cost per unit and variable cost per unit

Adamson, Inc. has the following cost data for Product X:

Direct materials $ 41 per unit Direct labor 57 per unit Variable manufacturing overhead 7 per unit Fixed manufacturing overhead 20,000 per year

Calculate the unit product cost using absorption costing and variable costing when production is 2,000 units, 2,500 units, and 5,000 units.

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