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Chapter 21: Q2OE (page 1172)

Question: Preparing absorption costing income statements, production less than sales

Refer to Exercise E21-19.

Requirements

  1. Prepare the May income statement using absorption costing.
  2. Is operating income using absorption costing higher or lower than variable costing income? Explain why.
  3. Determine the balance in Finished Goods Inventory as of May 31.

Short Answer

Expert verified

Answer

  1. Operating income is $290,000
  2. Lower
  3. Finished goods inventory as of May 31 is 0.

Step by step solution

01

Income statement using absorption costing

Particulars

Amount

Variable manufacturing cost

$9

Fixed manufacturing overhead ($91,000/22,000)

$4

Total unit product cost

$13

Particulars

Amount

Net sales revenue ($29x23,000)

$667,000

Less: Cost of goods sold (($13x23,000)

$299,000

Gross profit

$368,000

Less: Selling and administrative cost

Variable selling and administrative cost ($3x23,000)

$69,000

Fixed selling and administrative cost

$9,000

Operating Income

$290,000

Particulars

Amount

Net sales revenue ($29*23,000)

$667,000

Less: Variable costs ($12*23,000)

$276,000

Contribution margin

$391,000

Less: Fixed costs

Fixed costs of goods sold

$91,000

Fixed selling and administrative cost

$9,000

Operating Income

$291,000

02

comparison between income using absorption and variable costing. 

Operating income using absorption costing is lower than variable costing income because under the absorption method cost of 1,000 beginning inventory is taken as $16,000.

03

Balance of finished goods inventory as of May 31.

EndingbalanceinFinishedGoodsInventory=Beginningbalance+UnitsProduced-Unitssold=1,000units+22,000units-23,000units=0units

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Most popular questions from this chapter

Question: Communication Activity 21-1

In 100 words or fewer, explain the main differences and similarities between variable costing and absorption costing.

Preparing variable and absorption costing income statements Linda鈥檚 Foods produces frozen meals that it sells for \(7 each. The company computes a new monthly fixed manufacturing overhead allocation rate based on the planned number of meals to be produced that month. Assume all costs and production levels are exactly as planned. The following data are from Linda鈥檚 Foods鈥檚 first month in business:

January 2018

Units produced and sold:

Sales 1,000 meals

Production 1,200 meals

Variable manufacturing cost per meal \) 3

Sales commission cost per meal 1

Total fixed manufacturing overhead 660

Total fixed selling and administrative costs 500

Requirements:

  1. Compute the product cost per meal produced under absorption costing and under variable costing.
  2. Prepare income statements for January 2018 using: a. absorption costing. b. variable costing.
  3. Is operating income higher under absorption costing or variable costing in January?

Using variable costing, service company Henry鈥檚 Helpers provides locksmith services. One type of service call is to evaluate private residences for security concerns and make recommendations for a safety plan. Use the data below to determine the company鈥檚 total contribution margin, contribution margin per service call, and contribution margin ratio when 220 service calls are made in the month of June.

Service Revenue $ 170 per service call

Variable Costs 68 per service call

Fixed Costs 21,040 per month

Analyzing profitability analysis, service company Burlington Internet Services is an Internet service provider for commercial and residential customers. The company provided the following data for its two types of customers for the month of August:

For each type of customer, determine both the contribution margin per customer and the contribution margin ratio. Round to two decimal places.

Which type of service is more profitable?

How do service companies differ from manufacturing companies?
See all solutions

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