9-16 Variable and absorption costing: explaining operating-income differences. T

Question

9-16 Variable and absorption costing: explaining operating-income differences. TC Motors assembles and sells motor vehicles, and uses standard costing. Actual data relating to April and May 2015 are April May Unit data: Beginning inventory Production Sales 150 400 520 500 350 Variable costs: Manufacturing cost per unit produced Operating (marketing) cost per unit sold3,000 Manufacturing costs Operating (marketing) costs S 10,000 S10,000 3,000 S2000,000$2,000,000 Fixed costs s 600,000 S 600,000 The selling price per vehicle is s24,000. The budgeted level of production used to calculate the budgeted fixed manufacturing cost per unit is 500 units. There are no price, effici tion-volume variance is written off to cost of goods sold in the month in which it occurs Required ency, or rate variances. Any produc- 1. Prepare April and May 2015 statements of comprehensive income for TC Motors under la) variable costing and (b) absorption costing 2. Prepare a numerical re conciliation and explanation of the difference between operating income for each month under variable costing and absorption costing

Explanation / Answer

Compute the Variable costing Unit Product cost April May Variable Manufacturing Cost 10,000 10,000 Variable costing unit prroduct cost 10,000 10,000 Construct The Variable Costing Income Statement under FIFO April May Sales 8,400,000 12,480,000 Less: Variable cost    variable cost of goods sold 3,500,000 5,200,000    Variable selling expense 1,050,000 4,550,000 1,560,000 6,760,000 Contribution margin 3,850,000 5,720,000 Fixed expense:    Fixed Manufacturing overheads 2,000,000 2,000,000    Fixed selling expense 600,000 600,000 Net operating Income 1,250,000 3,120,000 Construct The Absorption Costing Unit Product Cost April May Variable Manufacturing Cost 10,000 10,000 Fixed Manufacturing Cost 4,000.00 5,000.00 Absorption costing unit prroduct cost 14,000.00 15,000.00 Construct the Absorption Costing Income Statement Under FIFO April May Sales $8,400,000 $12,480,000 Cost of Goods sold 4900000 7650000 Gross Margin $3,500,000 $4,830,000 Selling and distribution expense 1,650,000 2,160,000 Net operating income 1,850,000 2,670,000 Reconciliation: April Income under variable costing 1250000 Add: Fixed OH deferred in Ending ivnentory 600000 (150 units @4000) Income under absorption costing 1850000 May Income under Variable costing 3120000 Less: Fixed cost released in beg. Inv. 600000 Add: Fixed cost deferred in ending inventory 150000 (30*5000) Income under absorption costing 2670000

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