Question: Preparing variable and absorption costing income statements
Game Store manufactures video games that it sells for \(38 each. The company uses a fixed manufacturing overhead allocation rate of \)3 per game. Assume all costs and production levels are exactly as planned. The following data are from Game Store’s first two months in business during 2018:
October November
Sales 1,500 units 2,900 units
Production 2,800 units 2,800 units
Variable manufacturing cost per game \( 16 \) 16
Sales commission cost per game 8 8
Total fixed manufacturing overhead 8,400 8,400
Total fixed selling and administrative costs 8,000 8,000 Requirements
1. Compute the product cost per game produced under absorption costing and under variable costing.
2. Prepare monthly income statements for October and November, including columns for each month and a total column, using these costing methods:
a. absorption costing.
b. variable costing.
3. Is operating income higher under absorption costing or variable costing in October? In November? Explain the pattern of differences in operating income based on absorption costing versus variable costing.
4. Determine the balance in Finished Goods Inventory on October 31 and November 30 under absorption costing and variable costing. Compare the differences in inventory balances and the differences in operating income. Explain the differences in inventory balances based on absorption costing versus variable costing.
