Absorption costing and variable costing

Managerial Accounting 1B

Financial and Managerial Accounting

Chapter 19

Exercise 19-1 Income reporting under absorption costing and variable costing L.O. P2

Adams Company, a manufacturer of in-home decorative fountains, began operations on September 1 of the current year. Its cost and sales information for this year follows.


Production costs
Direct materials	$	40	per unit
Direct labor	$	60	per unit
Overhead costs for the year
Variable overhead	$	3,000,000
Fixed overhead	$	7,000,000
Nonproduction costs for the year
Variable selling and administrative	$	770,000
Fixed selling and administrative	$	4,250,000
Production and sales for the year
Units produced		100,000	units
Units sold		70,000	units
Sales price per unit	$	350	per unit

1.	Prepare an income statement for the company using absorption costing. (Input all amounts as positive values except net loss which should be indicated with a minus sign. Omit the “$” sign in your response.)

2.	Prepare an income statement for the company using variable costing. (Input all amounts as positive values except net loss which should be indicated with a minus sign. Omit the “$” sign in your response.)

3.	Under what circumstance(s) is reported income identical under both absorption costing and variable costing?

Exercise 19-4 Income reporting under absorption costing and variable costing L.O. P2

[The following information applies to the questions displayed below.]

Woodson Company, a producer of solid oak tables, reports the following data from its current year operations, which is its second year of business.


Sales price per unit	$	320	per unit
Units produced this year		115,000	units
Units sold this year		118,000	units
Units in beginning-year inventory		3,000	units
Beginning inventory costs
Variable (3,000 units × $135)	$	405,000
Fixed (3,000 units × $80)		240,000

Total	$	645,000
Production costs this year
Direct materials	$	40	per unit
Direct labor	$	62	per unit
Overhead costs this year
Variable overhead	$	3,220,000
Fixed overhead	$	7,400,000
Nonproduction costs this year
Variable selling and administrative	$	1,416,000
Fixed selling and administrative		4,600,000

2.Exercise 19-4 Part 1

1.	Prepare the current year income statement for the company using absorption costing. (Input all amounts as positive values except net loss which should be indicated with a minus sign. Leave no cells blank – be certain to enter “0” wherever required. Omit the “$” sign in your response.)

3.Exercise 19-4 Part 2

2.	Prepare the current year income statement for the company using variable costing. (Input all amounts as positive values except net loss which should be indicated with a minus sign. Leave no cells blank – be certain to enter “0” wherever required. Omit the “$” sign in your response.)

4.Exercise 19-6 Converting variable costing income to absorption costing income L.O. P2, P4

Lyon Furnaces prepares the income statement under variable costing for its managerial reports, and it prepares the income statement under absorption costing for external reporting. For its first month of operations, 375 furnaces were produced and 225 were sold; this left 150 furnaces in ending inventory. The income statement information under variable costing follows.


Sales (225 × $1,600)	$	360,000
Variable production cost (225 × $625)		140,625
Variable selling and administrative expenses (225 × $65)		14,625

Contribution margin		204,750
Fixed overhead cost		56,250
Fixed selling and administrative expense		75,000

Net income	$	73,500

1.	Prepare this company’s income statement for its first month of operations under absorption costing.(Input all amounts as positive values except net loss which should be indicated with a minus sign. Omit the “$” sign in your response.)

Exercise 19-9 Contribution margin format income statement L.O. P3

Polarix is a retailer of ATVs (all terrain vehicles) and accessories. An income statement for its Consumer ATV Department for the current year follows. ATVs sell, on average, for $3,800. Variable selling expenses are $270 each. The remaining selling expenses are fixed. Administrative expenses are 40% variable and 60% fixed. The company does not manufacture its own ATVs; it purchases them from a supplier for $1,830 each.

POLARIX Income Statement—Consumer ATV Department For Year Ended December 21, 2011
Sales			$	646,000
Cost of goods sold				311,100

Gross margin				334,900
Operating expenses
Selling expenses	$	135,000
Administrative expenses		59,500		194,500

Net income			$	140,400

Required:

1.	Prepare an income statement for this current year using the contribution margin format. (Input all amounts as positive values except net loss which should be indicated with a minus sign. Omit the “$” sign in your response.)

2.	For each ATV sold during this year, what is the contribution toward covering fixed expenses and that toward earning income? (Omit the “$” sign in your response.)

Contribution margin per ATV

Exercise 19-11 Absorption costing and over-production L.O. C2

Rourke Inc. reports the following annual cost data for its single product.


Normal production and sales level		60,000	units
Sales price	$	56.00	per unit
Direct materials	$	9.00
Direct labor	$	6.50	per unit
Variable overhead	$	11.00	per unit
Fixed overhead	$	720,000	in total

If Rourke increases its production to 80,000 units, while sales remain at the current 60,000 unit level, by how much would the company’s gross margin increase or decrease under absorption costing? Assume the company has idle capacity to double current production. (Omit the “$” sign in your response.)

Gross margin

7.Problem 19-1A Variable costing income statement and conversion to absorption costing income L.O. P2, P4

Torres Company began operations this year. During this first year, the company produced 100,000 units and sold 80,000 units. The absorption costing income statement for its first year of operations follows.


Sales (80,000 units × $50 per unit)			$	4,000,000
Cost of goods sold
Beginning inventory	$	0
Cost of goods manufactured (100,000 units × $30 per unit)		3,000,000

Cost of good available for sale		3,000,000
Ending inventory (20,000 × $30)		600,000

Cost of goods sold				2,400,000

Gross margin				1,600,000
Selling and administrative expenses				530,000

Net income			$	1,070,000

Additional Information

a.	Selling and administrative expenses consist of $350,000 in annual fixed expenses and $2.25 per unit in variable selling and administrative expenses.
b.	The company’s product cost of $30 per unit is computed as follows.


Direct materials	$	5	per unit
Direct labor	$	14	per unit
Variable overhead	$	2	per unit
Fixed overhead ($900,000 / 100,000 units)	$	9	per unit

Required:

1.	Prepare an income statement for the company under variable costing. (Input all amounts as positive values except net loss which should be indicated with a minus sign. Omit the “$” sign in your response.)

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