Champion Motors assembles and sells motor vehicles and uses standard costing. Ac

Question

Champion Motors assembles and sells motor vehicles and uses standard costing. Actual data relating to April and May 2014 are as follows: The selling price per vehicle is $27,000. The budgeted level of production used to calculate the budgeted fixed manufacturing cost per unit is 500 units. There are no price, efficiency, or spending variances. Any production-volume variance is written off to cost of goods sold in the month in which it occurs. Prepare April and May 2014 income statements for Champion Motors under (a) variable costing and (b) absorption costing. Prepare a numerical reconciliation and explanation of the difference between operating income for each month under variable costing and absorption costing.

Explanation / Answer

Ans-Below is income statement under both methods for March

Below is income statement under both method for April

Champion Motors Champion Motors Absorption Costing Income Statement Variable Costing Income Statement For the month Ended March 31 For the month Ended March 31 Particulars rate Amount ($) Particulars rate Amount ($) Sales (350*27000)           9,450,000 Sales (350*27000)        9,450,000 Less: Cost of goods sold Less: Variable Cost of goods sold Beginning Inventory (0*16800)                       -                         -   Beginning Inventory (0*12000)                  -   Add COGM            (500*16800)           8,400,000                       -   Add Variable cost of goods manufactured   (500*12000)     6,000,000 Goods Available for sale           8,400,000 Variable cost of goods available for sale     6,000,000 Ending inventory     (150*16800)           2,520,000           5,880,000 Ending inventory     (150*12000)     1,800,000        4,200,000 Gross Margin           3,570,000 Gross Contribution margin        5,250,000 Less: Selling and administrative expenses Variable selling expenses (350*2400)           840,000 Variable selling expenses (350 *2400)              840,000        4,410,000 Fixed Operating cost              650,000        1,490,000 Less Period Cost Net operating Profit/loss        2,080,000     Annual fixed manufacturing overhead     2,400,000     Fixed selling and administrative expense        650,000      3,050,000 Net operating Profit/loss      1,360,000

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