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ACTG 1P11 Lecture Notes - Lecture 17: Total Absorption Costing, Variable Cost, Gross Profit

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lemonbeetle162
1 Feb 2016
School
Brock University
Department
Accounting
Course
ACTG 1P11
Professor
Glenn Skrubbeltrang

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Document Summary

Absorption costing because all manufacturing costs are charged to, or absorbed by, the product external reporting use. Variable costing, only direct materials, direct labor, and variable manufacturing overhead costs are considered product costs. Fixed manufacturing overhead costs are recognized as period costs (expenses) when incurred. Selling and administrative expenses are period costs under both absorption and variable costing. Cost of goods manufactured (30,000 units ) Cost of goods sold (20,000 units ) Variable selling and administrative expenses (20,000 units ) One primary difference between variable and absorption costing: under variable costing, the fixed manufacturing overhead is charged as an expense in the current period. Therefore, when there are more units produced than sold, income under absorption costing is higher. When fewer units are produced than sold, income under absorption costing is lower. When units produced and sold are the same, net income will be equal under the two costing approaches.

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Related Questions

The Dorset Corporation produces and sells a single product. The following data refer to the year just completed:

Beginning inventory 0
Units produced 34,000
Units sold 25,900
Selling price per unit $ 482
Selling and administrative expenses:
Variable per unit $ 16
Fixed per year $ 362,600
Manufacturing costs:
Direct materials cost per unit $ 240
Direct labor cost per unit $ 56
Variable manufacturing overhead cost per unit $ 34
Fixed manufacturing overhead per year $ 578,000

Assume that direct labor is a variable cost.

Required:

a. Compute the unit product cost under both the absorption costing and variable costing approaches.

b. Prepare an income statement for the year using absorption costing.

c. Prepare an income statement for the year using variable costing.

d. Reconcile the absorption costing and variable costing net operating income figures in (b) and (c) above.

e following information applies to the questions displayed below.]

Diego Company manufactures one product that is sold for $72 per unit in two geographic regions—the East and West regions. The following information pertains to the company’s first year of operations in which it produced 43,000 units and sold 38,000 units.


Variable costs per unit:
Manufacturing:
Direct materials $ 22
Direct labor $ 14
Variable manufacturing overhead $ 3
Variable selling and administrative $ 5
Fixed costs per year:
Fixed manufacturing overhead $ 774,000
Fixed selling and administrative expenses $ 346,000


The company sold 28,000 units in the East region and 10,000 units in the West region. It determined that $170,000 of its fixed selling and administrative expenses is traceable to the West region, $120,000 is traceable to the East region, and the remaining $56,000 is a common fixed cost. The company will continue to incur the total amount of its fixed manufacturing overhead costs as long as it continues to produce any amount of its only product.

Difference of Variable Costing and Absorption Costing Net Operating Incomes
Variable costing net operating income (loss)
Add: Fixed manufacturing overhead cost deferred in inventory under absorption costing
Absorption costing net operating income (loss) $34,000

Absorption and Variable Costing Comparisons Peachtree Companymanufactures peach jam. Because of bad weather, its peach crop wassmall. The following data have been gathered for the summer quarterof 2014: Beginning inventory (cases) 0 Cases produced 9,000 Casessold 8,200 Sales price per case $ 60 Direct materials per case $ 8Direct labor per case $ 9 Variable manufacturing overhead per case$ 3 Total fixed manufacturing overhead $ 320,000 Variable sellingand administrative cost per case $ 2 Fixed selling andadministrative cost $ 48,000 (a) Prepare a functional incomestatement for the quarter using absorption costing. (Round answersto the nearest dollar. Do not use negative signs with your answers,EXCEPT if you calculate a net loss.) Peachtree Company Functional(Absorption Costing) Income Statement For the Summer Quarter 2014Sales $Answer Cost of goods sold: Variable costs $Answer Fixedcosts Answer Goods available Answer Ending inventory Answer AnswerGross profit Answer Operating expenses: Variable selling andadministrative $Answer Fixed selling and administrative AnswerAnswer Net income (loss) $Answer (b) Prepare a contribution incomestatement for the quarter using variable costing. (Do not usenegative signs with your answers, EXCEPT if you calculate a netloss.) Peachtree Company Contribution (Variable Costing) IncomeStatement For the Summer Quarter 2014 Sales $Answer Variableexpenses: Manufacturing $Answer Selling and administrative AnswerAnswer Contribution margin Answer Fixed expenses: Manufacturingoverhead $Answer Selling and administrative Answer Answer Netincome (loss) $Answer (c) What is the value of ending inventoryunder absorption costing? (Round answer to the nearest wholenumber.) $Answer (d) What is the value of ending inventory undervariable costing? $Answer (e) The difference in the value of endinginventory in parts (c) and (d) is explained by the followingdifference between absorption and variable costing: Variablecosting treats all manufacturing costs as variable costs whileabsorption costing treats only variable manufacturing costs asvariable costs. Absorption costing treats fixed costs as periodcosts while variable costing treats fixed costs as product costs.Variable costing assigns only variable manufacturing costs toproducts while absorption costing assigns both variable and fixedmanufacturing costs to products. Absorption costing treats allmanufacturing costs as period costs while variable costing treatsonly variable manufacturing costs as period costs. Check Next