Tabletops Products, Inc., has just organized a new division to manufacture and s
ID: 2475862 • Letter: T
Question
Tabletops Products, Inc., has just organized a new division to manufacture and sell specially designed tables using select hardwoods for personal computers. The division’s monthly costs are shown in the schedule below:
Prepare an income statement for the month using absorption costing.
Prepare a contribution format income statement for the month using variable costing.
Reconcile the absorption costing and variable costing net operating incomes in (2) and (3) above.
Tabletops Products, Inc., has just organized a new division to manufacture and sell specially designed tables using select hardwoods for personal computers. The division’s monthly costs are shown in the schedule below:
Explanation / Answer
Solution:
First of all we need to know what Variable Costing says and what absorption costing says about Product Cost.
Variable Costing System
- Under Variable Costing System, product costs includes variable manufacturing costs such as direct material, direct labor and variable manufacturing overheads .
- Under Variable Costing, the value of finished goods and work in process is also comprised only of Variable Costs.
- Variable Selling and distribution expenses are excluded for valuing the inventories.
- Fixed Costs are not considered for valuation of closing stock of finished goods.
Absorption Costing System
- Under this system, product cost includes both fixed and variable manufacturing expenses.
- Ending Inventory is valued on Production Cost.
- Manufacturing Fixed Costs are considered for valuation of Ending Inventory.
1) Computation of the unit product cost under absorption costing and variable costing
Unit Product Cost under Variable Costing
$ / Unit
Direct Materials
$88
Variable manufacturing overhead
$2
Unit Product Cost
$90
Unit Product Cost under Absorption Costing
$ / Unit
Direct Materials
$88
Variable manufacturing overhead
$2
Fixed manufacturing overhead costs
($139,200 / 2,400)
$58
Unit Product Cost
$148
2) Income statement for the month using absorption costing
Income Statement
Absorption Costing
Sales (1,920*360)
$691,200
Production Cost ($148*2,400)
$355,200
Add: Beginning Inventory
$0
Less: Ending Inventory
($355,200*480/2,400)
($71,040)
Cost of Goods Sold
$284,160
Gross Profit (Sales - COGS)
$407,040
Selling and administrative costs:
Variable (6% of Sales)
$41,472
Fixed
$154,000
Total Selling and administrative costs
$195,472
Operating Profit
$211,568
Note – Ending Inventory = 2,400 – 1,920 = 480 Units
Under Absorption Costing, Ending Inventory is valued at current production cost.
Current Production Cost for making 2,400 Units = $355,200
Then Value of Ending Inventory = $355,200 / 2,400 x 480 = $71,040
3) Income Statement Under Variable Costing
Income Statement
Variable Costing
Sales (1,920*360)
$691,200
Variable Production Cost ($98*2,400)
$235,200
Add: Beginning Inventory
$0
Less: Ending Inventory ($355,200*480/2,400)
($47,040)
Variable Cost of Goods Sold
$188,160
Variable Selling and Administrative Costs (6% of Sales)
$41,472
Total Variable Cost
$229,632
Contribution Margin (Sales - total Variable Costs)
$461,568
Fixed Costs:
Fixed manufacturing overhead costs
$139,200
Fixed Selling and Administrative Costs
$154,000
Total Fixed Cost
$293,200
Operating Profit (Contribution Margin - Total Fixed Cost)
$168,368
4) Reconciliation Statement between net operating income under the absorption costing and variable costing
Net Operating Income as per Variable Costing
$183,728
Add: Difference of Ending Inventory due to Fixed Manufacturing Expenses included in absorption costing but not included in variable costing
$27,840
Net Operating Income as per Absorption Costing
$211,568
Unit Product Cost under Variable Costing
$ / Unit
Direct Materials
$88
Variable manufacturing overhead
$2
Unit Product Cost
$90
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