Topic: Absorption and Variable Costing
3. Hudson Corporation wants to change to the variable costing method of inventory valuation for making internal decisions. The LIFO method is being used. The absorption statements of income for Years 1 and 2 are as follows:
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|
Year 1
|
Year 2
|
|
Sales (5,000 units)
|
$300,000
|
$300,000
|
|
Cost of Goods Sold
|
180,000
|
190,000
|
|
Gross Profit
|
$120,000
|
$110,000
|
|
SG&A expenses*
|
40,000
|
40,000
|
|
Net Income
|
mce_markernbsp; 80,000
|
mce_markernbsp; 70,000
|
*Selling and administrative expenses include variable costs of $2 per unit sold.
Production data are as follows:
|
|
Year 1
|
Year 2
|
|
Production units
|
8,000
|
6,000
|
|
Variable costs per unit
|
$30
|
$30
|
|
Fixed overhead costs
|
$48,000
|
$48,000
|
Required:
a. Compute the absorption cost per unit manufactured in Years 1 and 2.
b. Explain why the net income for Year 1 was higher than the net income for Year 2 when the same number of units was sold in each year.
c. Prepare income statements for both years using variable costing.
d. Reconcile the absorption costing and variable costing net income figures for each year. Start with variable costing net income.
Topic: Absorption Income Statement
4. The variable costing income statement for Crawford Company for this quarter is as follows:
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Crawford Company
Variable Costing Income Statements
For the current quarter
|
|
Sales (5,000 units)
|
|
$1,000,000
|
|
Cost of Goods Sold (variable)
|
$300,000
|
|
|
Variable selling (10% of sales)
|
100,000
|
400,000
|
|
Contribution Margin
|
|
mce_markernbsp; 600,000
|
|
|
|
|
|
Fixed manufacturing overhead
|
$240,000
|
|
|
Fixed administrative expenses
|
144,000
|
384,000
|
|
|
|
|
|
Net income
|
|
mce_markernbsp; 216,000
|
|
|
|
|
Selected data for the quarter concerning the operations of the company are as follows:
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Beginning inventory
|
0 units
|
|
Units produced
|
8,000 units
|
|
Direct manufacturing labor
|
$30 per unit
|
|
Direct manufacturing materials
|
16 per unit
|
|
Variable manufacturing overhead
|
14 per unit
|
Required: Prepare an absorption costing income statement for the quarter.
Topic: Absorption and Variable Costing Income Statements
5. Whittier Company produced 10,000 cases of cookies this year. It sold 9,500 cases for $20 each. There were no beginning inventories. Variable manufacturing costs were $60,000, and fixed manufacturing expenses were $100,000. Selling and administrative expenses were $20,000, all fixed.
Required:
a. Prepare income statements using the variable costing and absorption costing.
b. Reconcile the net income under absorption and variable costing.
Essay Questions
Topic: Absorption and Variable Costing Compared
1. Compare and contrast absorption and variable costing.
Topic: Fixed Cost as Period or Product Cost
2. Since fixed product costs are eventually recorded as expenses under both variable and absorption costing by the time the inventory is sold, why does it matter whether fixed overhead is treated as a product cost or a period cost?
Topic: Pros and Cons of Absorption and Variable Costing
3. Provide an argument in favor of using variable costing and an argument against the use of variable costing.