AFM102 Chapter Notes - Chapter 8: Total Absorption Costing, Earnings Before Interest And Taxes, Income Statement

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erinplatypus481

13 Jul 2018

School

University of Waterloo

Department

Accounting & Financial Management

Course

AFM102

Professor

Kun Huo

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Document Summary

Identify how variable costing differs from absorption costing and compute unit product costs under each method. Selling and administrative expense: these expenses are treated as period costs, regardless of costing method used and deducted from revenues as incurred. Prepare income statements using both variable and absorption costing. Reconcile variable costing and absorption costing operating incomes and explain why the two amounts differ. No change in inventories absorption costing operating income = variable costing operating income. *operating income is higher under absorption costing, since fixed manufacturing overhead cost is deferred in inventory under absorption costing as inventories increase. **operating income is lower under absorption costing, since fixed manufacturing overhead cost is released from inventory under absorption costing as inventories decrease. Variable costing: oi is not affected by changes in production under variable costing. Absorption costing: operating income is affected by changes in production under absorption costing.

Related Questions

1.Explain the difference between variable and full costing.

2.Explain why income calculated under full absorption costingwill be greater than income calculated under variable costing whenproduction exceeds sales. Explain how a manufacturing company can"bury" fixed manufacturing costs in ending inventory under fullabsorption costing.

3.If the fixed manufacturing overhead cost per unit under fullcosting is multiplied by the change in inventory between thebeginning and ending of the period, what does the resulting numberrepresent?

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

crimsontiger86

Mario's Foods produces frozen meals, which it sells for $9 each.The company uses the FIFO invenotry costing method, and it computesa new monthy fixed manufactoring overhead rate based on the actualnumber of meals produced that month. All cost and production levelsare exactly as planned. The following data are from the company'sfirst two months in business:

	JAN	FEB
Sales........................	1,600 meals	1,900 meals
Production...............	2,000 meals	1,600 meals
Variable manufactoring expense per meal	$5	$5
Sales commision expense per meal	$2	$2
Total fixed manfucuring overhead	$800	$800
Total fixed makerting and administrative expenses	$700	$700

Requirements:

1. Compute the product cost per meal produced underabsorptioncosting and under variable costing. Do this first for January, andthen for Febuary.

2. Prepare seperate monthly income statements for January andfor February, using the following:

a. Absorrption costing

b. Variable Costing

3. Is operating income higher under absorption costing orvariable costing in January? In February? Explain the pattern ofdifferences in operating income based on absorption costing versusvariable costing.

Requirement 1. Compute the product cost permeal under absortion costing and under variable costing. Do thisfirst for January and the Febuary

	JAN		FEB
	Absorbtion Costing	Variable Costing	Absorption Costing	Variable Costing
Total Product cost

Requirement 2a. Prepare seperate monthly incomestatements for January and for Feb, using absorption costing

Mario's Foods o

Contribution Margin Income Statement (variablecosting)

Month Ended

	Jan 31	Feb 31
Less

Requirement 2b. Prepare Marios Foods Jan and Feb incomeStatement using variable costing

Requirement 3. Is operating income higher under absorptioncosting or variable costing in Jan? In Feb? Explain the pattern ofdifferences in operating income based on absorption costing versusvariable costing.

In Jan, absorption costing operating income_____(equals,exceedsor less than) variable costing income. This is because unitsproduced ______(equal to, greater than, less than) units weresold.

Absorption costing some of _____(Jan or Feb) __________(fixedmanufacturing overhead, nonmaufactoring, variable maufactoringoverhead) costs in the units of ending inventory. These cost willnot be_____(capitalized, expensed, paid in for cash) until thoseare sold. Deferring these _________ ( fixed manufactoring overhead,nonmanufactoring, variable manufactoring overhead)cost to thefuture _______ (Increases, Decreases)January's absoprtion costingincome.

In Feb, absorption costing operating income ________ (equals,exceeds, less than) variable costing operating income. This isbecause units produced were _____ (equal to, greather than, lessthan)units sold for the month.

As inventory______(increases, declines) as was the case in thisFebruary, January's ________(fixed manufactoring overhead,nonmanufactoring, variable manufactoring overhead) costs thatabsorption costing assigned to that inventory are expensed in_______(Jan, Feb). This _______ ( increases, decreases)Febuary'sabsorption costing income.

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AFM102 Chapter Notes - Chapter 8: Total Absorption Costing, Earnings Before Interest And Taxes, Income Statement

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