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Chapter 21: Q38CP (page 1179)

Preparing variable and absorption costing income statements

This problem continues the Piedmont Computer Problem situation from Chapter 20. Piedmont Computer Company manufactures personal computers and tablets. Based on the latest information from the cost accountant, using the current sales mix, the weighted-average sales price per unit is \(750 and the weighed-average variable cost per unit is \)450. The company does not expect the sales mix to vary for the next year. Assume the beginning balance in Finished Goods Inventory is \(0. Additional data for the first month of 2020:

January 2020

Unitsproduced and sold: Sales 945 units Production 1,000 units Variable manufacturing cost per unit \) 450 Sales commission cost per unit 25 Total fixed manufacturing overhead 93,600 Total fixed selling and administrative costs 62,400

Requirements

1. Compute the product cost per unit produced under absorption costing and under variable costing.

2. Prepare income statements for January 2020 using: a. absorption costing. b. variable costing.

3. Is operating income higher under absorption costing or variable costing in January? What causes the difference?

Short Answer

Expert verified
  1. The product cost per unit under absorption and variable costing are $543.6 and $450 respectively.
  2. The operating income under absorption and variable costingare $109,023 and $103,875 respectively.
  3. Yes, operating income higher under absorption costing than variable costing because of difference in method of allocation of fixed cost.

Step by step solution

01

Calculation of product cost per unit

Particulars

Absorption Costing

Variable Costing

Variable manufacturing cost per unit

$450

$450

Fixed manufacturing overhead per unit (93,600/1,000)

$93.6

-

Product cost per unit

$543.6

$450

02

Income statement as per absorption costing

Particulars

Amount

Net sales revenue ($750x945)

$708,750

Less: Cost of goods sold ($543.6x945)

$513,702

Gross profit

$195,048

Less: Variable selling and administrative costs ($25x945)

$23,625

Less: Fixed selling and administrative costs

$62,400

Operating income

$109,023

03

Income statement as per variable costing

Particulars

Amount

Net sales revenue ($750x945)

$708,750

Less: Variable cost ($450x945)

$425,250

Less: Variable selling and administrative expenses ($25x945)

$23,625

Contribution Margin

$259,875

Less: Fixed manufacturing costs

$93,600

Less: Fixed selling and administrative costs

$62,400

Operating income

$103,875

04

Profitability Analysis

The operating income under absorption costing is higher than that in variable costing because under absorption costing manufacturing fixed overheads are not fully absorbed in the current year due to short sales

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Most popular questions from this chapter

Question: Chaney Company provides lawn care services. Following are data for a recent week:

Service Revenue \(1,300

Variable Costs \)780

Contribution Margin $520 Chaney provided service to 25 customers during the week. Determine the average amount the company charged each customer, the variable cost per customer, and the contribution margin ratio.

Using variable costing, service company Henry’s Helpers provides locksmith services. One type of service call is to evaluate private residences for security concerns and make recommendations for a safety plan. Use the data below to determine the company’s total contribution margin, contribution margin per service call, and contribution margin ratio when 220 service calls are made in the month of June.

Service Revenue $ 170 per service call

Variable Costs 68 per service call

Fixed Costs 21,040 per month

Question: Computing variable costing operating income Refer to the information for Concord, Inc.

Requirements:

  1. Using variable costing, calculate the unit product cost.
  2. Prepare an income statement using the contribution margin format.

Use the following information for Exercises E21-14 and E21-15.

Concord, Inc. has collected the following data for November (there are no beginning inventories):

Units produced and sold 500 units Sales price $ 450 per unit Direct materials 64 per unit Direct labor 68 per unit Variable manufacturing overhead 26 per unit Fixed manufacturing overhead 7,500 per month Variable selling and administrative costs 15 per unit Fixed selling and administrative costs 4,400 per month

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?

: 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?
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