B. It distinguishes between manufacturing and nonmanufacturing costs. Your answe

Question

B. It distinguishes between manufacturing and nonmanufacturing costs. Your answer is correct. Swan Textiles Inc. produces and sells a decorative pillow for $98.00 per unit. In operation, 2,200 units were produced and 1,800 units were sold. Actual fixed co amount budgeted for the month. Other information for the month includes per unit per unit per unit per unit Variable manufacturing costs $22.00 Variable marketing costs $3.90 Fixed manufacturing costs $14.00 Administrative expenses, all fixed $19.50 Ending inventories: Direct materials minus-Ominus- minus-Ominus- 400 WIP units Finished goods What is the operating income using variable costing? $56,080 This is the correct answer

Explanation / Answer

Swan Textiles Inc

Determination of operating income using variable costing:

Determination of operating income under variable costing:

Sales

1,800 units x $98

$176,400

Variable cost of goods sold:

Beginning inventory

0

Manufacturing cost

(2,200 x $22)

$48,400

Cost of goods available for sale

$48,400

Ending Finished Goods

400 x $22

($8,800)

variable cost of goods sold

($39,600)

Gross Contribution Margin

$136,800

Variable marketing costs

$3.90 x 1,800

($7,020)

Contribution Margin

$129,780

Less: Fixed Costs:

Manufacturing overhead

$30,800

Administrative Expenses

$42,900

($73,700)

Net Operating Income

$56,080

Note: Fixed costs including manufacturing overhead and administrative overhead are calculated based on the entire units produced as the fixed costs are period costs. These costs are to be arrived at full and no part of these costs is allotted to ending inventory and the entire cost is deemed to have been expensed during the current period.

Hence,

Fixed manufacturing overhead = $14 x 2,200 = $30,800

Fixed administrative expenses = $19.50 x 2,200 = $42,900

Determination of operating income under variable costing:

Sales

1,800 units x $98

$176,400

Variable cost of goods sold:

Beginning inventory

0

Manufacturing cost

(2,200 x $22)

$48,400

Cost of goods available for sale

$48,400

Ending Finished Goods

400 x $22

($8,800)

variable cost of goods sold

($39,600)

Gross Contribution Margin

$136,800

Variable marketing costs

$3.90 x 1,800

($7,020)

Contribution Margin

$129,780

Less: Fixed Costs:

Manufacturing overhead

$30,800

Administrative Expenses

$42,900

($73,700)

Net Operating Income

$56,080

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