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Chapter 21: Q-21-5RQ (page 1166)
When units produced exceed units sold, how does operating income differ between variable costing and absorption costing? Why?
Answer
Operating income under absorption costing is higher compared to variable costing because some fixed costs remain in ending inventory unexpended.
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Question: Preparing absorption costing income statements, production exceeds sales
Refer to Exercise E21-16.
Requirements:
When units produced are less than units sold, how does operating income differ between variable costing and absorption costing? Why
In the long run, all costs are controllable. Is this statement true? Why or why not?
Setting sales prices The Sweet Treats Company manufactures candy that is sold to food distributors. The company produces at full capacity for six months each year to meet peak demand during the 鈥渃andy season鈥� from Halloween through Valentine鈥檚 Day. During the other six months of the year, the manufacturing facility operates at 75% of capacity. The Sweet Treats Company provides the following data for the year:
Cases of candy produced and sold 1,800,000 cases Sales price $ 37.00 per case Variable manufacturing costs 20.00 per case Fixed manufacturing costs 6,400,000 per year Variable selling and administrative costs 2.00 per case Fixed selling and administrative costs 3,500,000 per year The Sweet Treats Company receives an offer to produce 13,000 cases of candy for a special event. This is a one-time opportunity during a period when the company has excess capacity. What is the minimum sales price The Sweet Treats Company should accept for the order? Explain why
Question: Preparing variable and absorption costing income statements
Game Store manufactures video games that it sells for \(38 each. The company uses a fixed manufacturing overhead allocation rate of \)3 per game. Assume all costs and production levels are exactly as planned. The following data are from Game Store鈥檚 first two months in business during 2018:
October November
Sales 1,500 units 2,900 units
Production 2,800 units 2,800 units
Variable manufacturing cost per game \( 16 \) 16
Sales commission cost per game 8 8
Total fixed manufacturing overhead 8,400 8,400
Total fixed selling and administrative costs 8,000 8,000 Requirements
1. Compute the product cost per game produced under absorption costing and under variable costing.
2. Prepare monthly income statements for October and November, including columns for each month and a total column, using these costing methods:
a. absorption costing.
b. variable costing.
3. Is operating income higher under absorption costing or variable costing in October? In November? Explain the pattern of differences in operating income based on absorption costing versus variable costing.
4. Determine the balance in Finished Goods Inventory on October 31 and November 30 under absorption costing and variable costing. Compare the differences in inventory balances and the differences in operating income. Explain the differences in inventory balances based on absorption costing versus variable costing.
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