Inventory Valuation under Absorption Costing and Variable Costing At the end of
ID: 2549030 • Letter: I
Question
Inventory Valuation under Absorption Costing and Variable Costing
At the end of the first year of operations, 6,600 units remained in the finished goods inventory. The unit manufacturing costs during the year were as follows:
Determine the cost of the finished goods inventory reported on the balance sheet under (a) the absorption costing concept and (b) the variable costing concept.
$
eBook
Calculator
Print Item
Product Profitability Analysis
PowerTrain Sports Inc. manufactures and sells two styles of All Terrain Vehicles (ATVs), the Mountain Monster and Desert Dragon, from a single manufacturing facility. The manufacturing facility operates at 100% of capacity. The following per-unit information is available for the two products:
In addition, the following sales unit volume information for the period is as follows:
a. Prepare a contribution margin by product report. Calculate the contribution margin ratio for each product as a whole percent.
b. What advice would you give to the management of PowerTrain Sports Inc. regarding the relative profitability of the two products?
The line provides the largest total contribution margin and the largest contribution margin ratio. If the sales mix were shifted more toward the line, the overall profitability of the company would increase.
Estimated Income Statements, using Absorption and Variable Costing
Prior to the first month of operations ending October 31 Marshall Inc. estimated the following operating results:
The company is evaluating a proposal to manufacture 21,600 units instead of 19,200 units, thus creating an Inventory, October 31 of 2,400 units. Manufacturing the additional units will not change sales, unit variable factory overhead costs, total fixed factory overhead cost, or total selling and administrative expenses.
a. 1. Prepare an estimated income statement, comparing operating results if 19,200 and 21,600 units are manufactured in the absorption costing format. If an amount box does not require an entry leave it blank or enter “0”.
a. 2. Prepare an estimated income statement, comparing operating results if 19,200 and 21,600 units are manufactured in the variable costing format. If an amount box does not require an entry leave it blank or enter “0”.
b. What is the reason for the difference in income from operations reported for the two levels of production by the absorption costing income statement?
The increase in income from operations under absorption costing is caused by the allocation of overhead cost over a number of units. Thus, the cost of goods sold is . The difference can also be explained by the amount of overhead cost included in the inventory.
Variable Costing Income Statement
The following data were adapted from a recent income statement of Bluth Company:
Assume that the variable amount of each category of operating costs is as follows:
a. Based on the data given, prepare a variable costing income statement for Bluth Company, assuming that the company maintained constant inventory levels during the period.
b. If Bluth Company reduced its inventories during the period, what impact would that have on the income from operations determined under absorption costing?
If Bluth Company reduced its inventories during the period, then the cost of products sold would fixed costs allocated to the beginning inventories. Thus, the total fixed costs of products sold on the absorption costing income statement would be , and the income from operations would be .
Direct materials $36.70 Direct labor 20.80 Fixed factory overhead 5.30 Variable factory overhead 4.70Explanation / Answer
SOLUTION
1. Inventory Valuation under Absorption Costing and Variable Costing
Under Absorption Costing, all costs are included.
Under Variable costing, only variable costs are included.
Cost of finished goods inventory under Absorption costing = $242,220 + $137,280 + $34,980 + $31,020
= $445,500
Cost of finished goods inventory under Variable costing = $242,220 + $137,280 + $31,020
= $410,520
Particulars Calculations Amount ($) Direct materials 6,600*$36.70 242,220 Direct labor 6,600*$20.80 137,280 Fixed factory overhead 6,600*$5.30 34,980 Variable factory overhead 6,600*$4.70 31,020Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.