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ADM 2341 Lecture Notes - Lecture 8: Income Statement, Total Absorption Costing, Variable Cost

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amaranthfrog922
23 Mar 2016
School
University of Ottawa
Department
Administration
Course
ADM 2341
Professor
Bergquist Bob

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Document Summary

Absorpion cosing treats all manufacturing costs as product costs, regardless of whether they are variable or ixed. The cost of a unit of product under the absorpion cosing method therefore consists of direct materials, direct labour, and both variable and ixed manufacturing overhead. A cosing method that includes only variable manufacturing cost direct materials, direct labour, and variable manufacturing overhead in the cost of a unit of product. Fixed manufacturing overhead is treated as a period cost, like selling and administraive costs. These expenses are rarely treated as product costs, regardless of the cosing method in use. Under either absorpion or variable cosing, selling and administraive expenses are always treated as period costs and deducted from revenues and incurred. Under the absorpion cosing method, all manufacturing costs, variable and ixed, are included when determining the unit product cost. Under the variable cosing method, only the variable manufacturing costs are included in product costs.

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Related Questions

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

Denton Company manufactures and sells a single product.
Cost data for the product are given below:

Variable costs per unit:

Direct materials $7
Direct labor $10
Variable manufacturing overhead $5
Variable selling and administrative $3
Total variable cost per unit $25

Fixed costs per month:

Fixed manufacturing overhead $ 315,000
Fixed selling and administrative $ 245,000
Total fixed cost per month $ 560,000
The product sells for $60 per unit.

Production and sales data for July and August, the first two months of operations, follow:
          Units Produced    Units Sold
July          17,500           15,000
August      17,500           20,000

The company’s Accounting Department has prepared absorption costing income statements for July and August as presented below:


                                                       July                 August
Sales                                            $900,000          $1,200,000    
Cost of goods sold                         $600,000              $800,000     
Gross margin                                 $300,000             $400,000    
Selling and administrative expenses  $290,000            $305,000     
Net operating income                       $10,000             $95,000   

Required:

1. Determine the unit product cost under absorption costing and variable costing.

2. Prepare contribution format variable costing income statements for July and August.

3. Reconcile the variable costing and absorption costing net operating income figures.
*July/August
Variable costing net operating income (loss)
Add/Deduct fixed manufacturing overhead cost deferred in/released from
inventory under absorption costing
Absorption costing net operating income/loss

 

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.