Fletcher Company manufactures and sells one product. The following information p
ID: 2427350 • Letter: F
Question
Fletcher Company manufactures and sells one product. The following information pertains to each of the company's first two years of operations: During its first year of operations, Fletcher produced 50,000 units and sold 40,000 units. During its second year of operations, it produced 40,000 units and sold 50,000 units. The selling price of the company's product is $50 per unit. (1.) Assume the company uses variable costing: (a.) Compute the unit product cost for year 1 and year 2.( b.) Prepare an income statement for year 1 and year 2. (2) Assume the company uses absorption costing: a. Compute the unit product cost for year 1 and year 2. (b.) Prepare an income statement for year 1 and year 2. (3) Explain the difference between variable costing and absorption costing net operating income in year 1. Also explain why the two net operating incomes differ in year 2.
Explanation / Answer
1./A./ UNIT COST UNDER VARIABLE COSTING FOR YEAR 1 & 2
B./ INCOME STATEMENT UNDER VARIABLE COSTING YEAR 1
INCOME STATEMENT UNDER VARIABLE COSTING YEAR 2
2./ A./
UNIT COST UNDER VARIABLE COSTING FOR YEAR 1
UNIT COST UNDER VARIABLE COSTING FOR YEAR 2
B./ INCOME STATEMENT UNDER ABSORPTION COSTING YEAR 1
COST OF GOODS SOLD(CGS) = BEGINNING INVENTORY + TOTAL MANUFACTURE - ENDING INVENTORY
= 0 + (50000 * $40) - (10000 * $40)
= $2000000 - $400000
= $1600000
GROSS PROFIT = SALES - CGS
= (40000 * $50) - $1600000
= $2000000 - $1600000
= $400000
NET PROFIT = GROSS PROFIT - VARIABLE SELLING OVERHEAD - FIXED SELLING OVERHEAD
= $400000 - (40000 * $3) - $80000
= $200000
INCOME STATEMENT UNDER ABSORPTION COSTING YEAR 2
COST OF GOODS SOLD(CGS) = BEGINNING INVENTORY + TOTAL MANUFACTURE - ENDING INVENTORY
= (10000 * $40) + (40000 * $41) - 0
= $400000 + $1640000
= $2040000
GROSS PROFIT = SALES - CGS
= (50000 * $50) - $2040000
= $2500000 - $2040000
= $460000
NET PROFIT = GROSS PROFIT - VARIABLE SELLING OVERHEAD - FIXED SELLING OVERHEAD
= $460000 - (50000 * $3) - $80000
= $230000
3./
THE NET OPERATING INCOME UNDER VARIABLE COSTING IS $160000 AND ABSORPTION COSTING IS $200000, THESE DIFFRENCE ARRISE BECAUSE OF THE TREATMENT OF FIXED COST.
AMOUNT $ DIRECT MATERIAL COST 20 DIRECT LABOUR 12 VARIABLE MANUFACTURING COST 4 UNIT PRODUCT COST FOR YEAR 1 & 2 36Related Questions
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