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Chapter 21: Q-21-6RQ (page 1166)

When units produced are less than units sold, how does operating income differ between variable costing and absorption costing? Why

Short Answer

Expert verified

Answer

When units produced are less than units sold the operating income from the absorption method is lower than the operating income from the variable costing method.

Step by step solution

01

When units produced are less than units sold

When units produced are less than units sold, it means there is some opening balance in inventory.

02

Difference in operating income

When units produced are less than units sold the operating income from the absorption method is lower than the operating income from the variable costing method because under variable costing only current period fixed manufacturing overheads were expensed, whereas absorption costing fixed manufacturing overheads of beginning inventory also expensed.

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Most popular questions from this chapter

When units produced equal units sold, how does operating income differ between variable costing and absorption costing?

When units produced exceed units sold, how does operating income differ between variable costing and absorption costing? Why?

Using Excel for variable costing

Download an Excel template for this problem online in MyAccountingLab or athttp://www.pearsonhighered.com/Horngren. Tiger Mountain Gelato incurs thefollowing costs for its premium ice cream in May 2018:

Direct materials cost per pint $ 2.50 perpint

Direct labor cost per pint 0.75 per pint

Variable manufacturing overhead cost per pint 0.25 per pint

Fixed manufacturing overhead costs 6,000 per month

Total fixed selling and administrative costs 5,000 per month

Sales price per pint 8.00 per pint

Pints of gelato produced 12,000 pints

Pints of gelato sold 11,500 pints

There were no beginning inventories, so Tiger Mountain Gelato has 500 pintsin ending Finished Goods Inventory (12,000 pints produced less 11,500 pintssold).

Requirements

1. Calculate Tiger Mountain Gelato鈥檚 product cost per pint under absorptioncosting and variable costing.

2. Calculate the balance in Finished Goods Inventory on May 31, 2018, usingabsorption costing and variable costing.

3. Prepare income statements in good form for Tiger Mountain Gelato for May2018 using absorption costing and variable costing.

4. Reconcile the differences between operating incomes and Finished GoodsInventory balances between the two-costing method

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.

Explain why the fixed manufacturing overhead cost per unit changes when there is a change in the number of units produced.
See all solutions

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