Scribd
Upload
263 views4 pages

Suggested Solution:: 1. Prepare A Variable Costing Income Statement and An Absorption Costing Income Statement

1. The document discusses the key differences between absorption costing and variable costing, including how they treat costs, calculate per unit costs, report on financial statements, and defer costs. 2. It provides an example where absorption costing reports a higher profit and inventory balance compared to variable costing due to including fixed overhead costs in the inventory valuation. 3. The difference in reported profits between the two methods is reconciled as the amount of fixed costs deferred in inventory under absorption costing.

Uploaded by

詹鎮豪
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
263 views4 pages

Suggested Solution:: 1. Prepare A Variable Costing Income Statement and An Absorption Costing Income Statement

1. The document discusses the key differences between absorption costing and variable costing, including how they treat costs, calculate per unit costs, report on financial statements, and defer costs. 2. It provides an example where absorption costing reports a higher profit and inventory balance compared to variable costing due to including fixed overhead costs in the inventory valuation. 3. The difference in reported profits between the two methods is reconciled as the amount of fixed costs deferred in inventory under absorption costing.

Uploaded by

詹鎮豪
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 4

Suggested Solution:

1. Prepare a variable costing income statement and an absorption costing income statement.

2. Prepare an analysis of the differences between the two approaches including what per unit cost
would be under both approaches.

The main differences between absorption costing and variable costing include:

• Users. Absorption costing is used for external purposes (follows GAAP) and variable costing
is used for internal purposes (management accounting).

• Reporting. The costing approaches have their own income statement format (as illustrated
in Question 1).
• Different treatment of costs. The absorption method treats all manufacturing costs as
product costs and selling and administration costs as period costs, while variable costing
separates the costs into their variable and fixed classifications.

• Per unit cost. Under absorption costing, fixed manufacturing overhead is included as a
product cost while it is not included in the variable costing product cost. This leads to a
difference in per unit product cost.

• Deferred costs. By including it in the per unit product cost, fixed manufacturing overhead is
unitized based on the number of units produced. This provides the opportunity to defer
fixed manufacturing overhead costs in ending inventory by producing more units than are
sold. This will not happen with variable costing because per unit cost does not change with
changes in the level of production.

• Financial statements. The difference in classification results in different amounts reported


on the balance sheet for ending inventory, and on the income statement for cost of goods
sold, and profit. For example, referring to the situation in the case, if 460 units were
produced, but only 400 units are sold then updated income statements will show different
income and ending inventory amounts. (Assume beginning inventory is zero.) As shown in
the following statements:

Under variable costing: Profit, $2,800,000; Ending inventory, $5,400,000


Under absorption costing: Profit, $4,000,000; Ending inventory, $6,600,000
3. Prepare a reconciliation of absorption costing net income and variable costing net income.

Referring to the statements in Question 2, absorption costing net income is $4,000,000 while
variable costing net income is only $2,800,000 yet both statements are based on sales of 400 units.
The difference, $1,200,000, is the amount of fixed manufacturing costs that are included in the
product cost of ending inventory under the absorption costing approach. Notice that ending
inventory under variable costing is $5,400,000 while it is $6,600,000 under the absorption approach.
Variable costing recognizes the full amount of fixed manufacturing overhead as a period cost—none
of it is included in ending inventory.
The difference in net income is not permanent. When the units in ending inventory are sold in
subsequent months, the deferred fixed manufacturing overhead will be released and included in
cost of goods sold then. This happens when production is less than sales.

4. Prepare an analysis of the minimum dollar amount of sales required in order to cover the period
costs.

The minimum dollar amount of sales needed to cover period costs would be the break-even point.
This is determined by dividing fixed (period) costs by the contribution margin ratio. Using the
information from Question #1:

Contribution margin ratio = $22,080,000/$65,780,000 = 0.3357

Break-even = $16,100,000/0.3357 = $47,959,488

The minimum dollar amount of sales needed to cover period costs is approximately $48,000,000, or
about 335 units.

You might also like

pFad - Phonifier reborn

Pfad - The Proxy pFad of © 2024 Garber Painting. All rights reserved.

Note: This service is not intended for secure transactions such as banking, social media, email, or purchasing. Use at your own risk. We assume no liability whatsoever for broken pages.


Alternative Proxies:

Alternative Proxy

pFad Proxy

pFad v3 Proxy

pFad v4 Proxy