Avant Designs designs and manufactures polished-nickel fashion bracelets. It off

Question

Avant Designs designs and manufactures polished-nickel fashion bracelets. It offers two bracelets: Aztec and Mayan. The following data summarize budgeted operations for the current year:

Budgeted fixed manufacturing overhead for the year was $258,000.

Required:

a. Prepare the budgeted income statement for the year using variable costing.

b. Prepare the budgeted income statement for the year using absorption costing. Budgeted fixed manufacturing overhead is allocated to the two bracelets using machine minutes.

c. Explain the difference in the two net income figures computed in parts ( a) and ( b). That is, reconcile any difference in earnings and explain why it occurs.

Explanation / Answer

a. The budgeted variable costing income statement: Avant Designs Budgeted Income Statement - Variable Costing Current Year Aztec Mayan Total $12 $15 Sales price $4 $5 Variable cost Contribution margin 30,000 20,000 Units sold Net Margin Budgeted fixed manufacturing overhead Net Income b Prepare the budgeted income statement for the year using absorbtion costing. budgeted fixed manufacturing overhead is allocated to the bracelets using machine minutes. manufacturing overhead is allocated to the bracelets using machine minutes. Avant Designs b. Calculation of Budgeted Machine Minutes Current Year Total Change in Units Machine Machine Units Sold Produced Minutes/unit Minutes Inventory Aztec Mayan Budgeted machine minutes Fixed manufacturing overhead rate = The next step is calculating the fully absorbed cost of manufacturing each bracelet. Avant Designs Calculation of Fully Absorbed Cost per Bracelet Current Year Fixed Manufacturing Fully Overhead Absorbed Mathine Rate/Machine Overhead Cost Per Variable Cost Minutes/Units Minutes per Bracelet Bracelet Aztec Mayan Avant Designs Budgeted Income Statement - Absorption Costing Current Year Aztec Mayan Total Sales Price Absorption Cost Net margin per bracelet Units sold Net Margin Net Income c. Explain the difference in earnings and explain why it occurs. Avant Designs c. Reconciliation of Net Incomes Computed Using Absorption and Variable Costing Current Year Machine Machine Change in Minutes per Minutes in Inventory Bracelet Inventory Aztec Mayan Total machine minutes in inventory Fixed manufacturing overhead rate per machine minute Total fixed manufacturing overhead in inventory Avant Designs Reconciliation of Net Incomes Computed Using Absorption and Variable Costing Current Year Ending Ending Variable Cost Inventory Inventory Per Bracelet Value Aztec Mayan Ending Inventory (Variable Costing) Full Absorption Ending Ending Cost per Inventory Inventory Bracelet Value Aztec Mayan Ending Invenroty (Obsorption Costing) Difference in Inventory Values able Costing able Costing

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