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Preparing variable and absorption costing income statements

Game Source manufactures video games that it sells for \(43 each. The company uses a fixed manufacturing overhead allocation rate of \)5 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 2,500 units 2,500 units Variable manufacturing cost per game \( 17 \) 17Sales commission cost per game 7 7Total fixed manufacturing overhead12,500 12,500

Total fixed selling and administrative costs 11,500 11,500 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.

Short Answer

Expert verified
  1. Total unit product cost is $22 and $17under absorption and variable costing respectively.
  2. a) gross profit is $31,500 and $60,900 for October and November respectively.
  1. Contribution margin is $28,500 and $55,100for October and November respectively.

Step by step solution

01

Calculation of unit product cost using variable and absorption costing 

Particulars

Absorption costing

Variable Costing

Variable manufacturing overhead

$17

$17

Fixed manufacturing overhead ($12,500/2,500)

$5

-

Total unit product cost

$22

$17

02

Income statement absorption costing format 

Particulars

October (1,500 Units)

November (2,900 Units)

Net sales revenue

$43x1,500

=$64,500

$43x2,900 =$124,700

Less: Cost of goods sold

$22x1,500 =$33,000

$22x2,900 =$63,800

Gross profit

$31,500

$60,900

Variable selling and administrative cost

$7x1,500 =$10,500

$7x2,900 =$20,300

Fixed selling and administrative cost

$11,500

$11,500

Operating Income

$9,500

$29,100

03

Income statement variable costing format

Particulars

October (1,500 Units)

November (2,900 Units)

Net sales revenue

$43x1,500

=$64,500

$43x2,900 =$124,700

Less: Cost of goods sold

Variable cost of goods sold

$17x1,500 =$25,500

$17x2,900 =$49,300

Variable selling and administrative cost

$7x1,500 =$10,500

$7x2,900 =$20,300

Contribution margin

$28,500

$55,100

Less: Fixed costs

Fixed costs of goods sold

$12,500

$12,500

Fixed selling and administrative cost

$11,500

$11,500

Operating Income

$4,500

$31,100

04

 Step 4: Profitability Analysis

Operating income is higher under absorption costing in October because units produced are higher than the units sold. Operating income in November is higher under variable costing because units sold are higher than the units produced

05

Calculation of ending inventory 

Particulars

October

November

Beginning inventory

0

1,000

(+) Units produced

2,500

2,500

(-) Units sold

1,500

2,900

Ending inventory

1,000

600[SS1]


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Most popular questions from this chapter

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

When should a company use absorption costing when setting sales prices? When should it use variable costing?

Explain how increasing production can increase gross profit when using absorption costing.

Hayden Company has 50 units in Finished Goods Inventory at the beginning of the accounting period. During the accounting period, Hayden produced 150 units and sold 200 units for \(150 each. All units incurred \)80 in variable manufacturing costs and \(20 in fixed manufacturing costs. Hayden also incurred \)7,500 in Selling and Administrative Costs, all fixed. Calculate the operating income for the year using absorption costing and variable costing.

How do service companies differ from manufacturing companies?

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