Chenango Can Company manufactures metal cans used in the food-processing industr

Question

Chenango Can Company manufactures metal cans used in the food-processing industry. A case of cans sells for $30. The variable costs of production for one case of cans are as follows:

Variable selling and administrative costs amount to $.80 per case. Budgeted fixed manufacturing overhead is $623,000 per year, and fixed selling and administrative cost is $45,000 per year. The following data pertain to the company’s first three years of operation. (A unit refers to one case of cans.)

Prepare operating income statements for Chenango Can Company for its first three years of operations using:

             

             

Reconcile Chenango Can Company’s operating income reported under absorption and variable costing for each of its first three years of operation. Use the shortcut method.

      

Suppose that during Chenango's fourth year of operation actual production equals planned production, actual costs are equal to budgeted costs, and the company ends the year with no inventory on hand.

What will be the difference between absorption-costing operating income and variable-costing operating income in year 4?

             

What will be the relationship between total operating income for the four-year period as reported under absorption and variable costing?

Chenango Can Company manufactures metal cans used in the food-processing industry. A case of cans sells for $30. The variable costs of production for one case of cans are as follows:

Explanation / Answer

Solution 1:

Solution 2:

Solution 3a:

Difference between absorption-costing operating income and variable-costing operating income in year 4 = $791,050 - $694,800 = $96,250

Solution 3b:

Total operating income for four year period under absorption costing = $595,800 + $397,800 + $694,800 +$694,800 = $2,383,200

Total operating income for four year period under variable costing = $595,800 + $205,300 + $791,050 +$791,050 = $2,383,200

Therefore total operating income will be same under absorption and variable costing.

Computation of Unit Product Cost - Variable Costing Particulars Year 1 Year 2 Year 3 Unit Product Cost: Direct material $6.00 $6.00 $6.00 Direct Labor $2.00 $2.00 $2.00 Variable manufacturing overhead $7.00 $7.00 $7.00 Unit Product Cost $15.00 $15.00 $15.00

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