Problem:
Case of cans sells for $50. Variable standard costs of production for one case of cans are:
Direct material....$15
Direct labour....5
Variable manufacturing overhead ....12
total variable manufacturing cost per case ....$32
Variable selling and admin costs amount to $1 per case. Budgeted fixed manufacturing overhead is $800,000 per year and selling and admin cost is $75,000 per year. Data pertain too the first three years of operation is:
|
year 1 |
year 2 |
year 3 |
| Planned production in units |
80,000 |
80,000 |
80,000 |
| Finished goods inventory in units Jan 1 |
0 |
0 |
20,000 |
| Actual production in units |
80,000 |
80,000 |
80,000 |
| Sales in units |
80,000 |
60,000 |
90,000 |
| finished goods inventory in units Dec31 |
0 |
20,000 |
10,000 |
There were no variances during first three years of operation.
Actual costs were the same as budgeted and standard costs.
Problem 1. Prepare operating income statement for its first three years of operation using
a. absorption costing
b. variable costing
Problem 2. Reconcile operating income reported under absorption and variable costing using shortcut method.
Problem 3. suppose that fourth year of operation actual production equals planned production, actual costs are equal to budgeted or standard costs and the company ends the yer with no inventory
a. what will be the difference between absorption costing income and variable costing income in year four.