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What are the advantages and disadvantages of using thecontribution margin format based on variable costing compared tothe traditional income statement format based on full absorptioncosting? Why do you think absorption costing is the system requiredby GAAP and the IRS?

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Jamar Ferry
Jamar FerryLv2
28 Sep 2019

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KESSLER CORPORATION

The KESSLER CORPORATION is a brand new company as of January 1, 2017. It sells chairs for $300 per unit. The following data are related to 2017:

Sales 100 chairs

Production 100 chairs

Total Costs

Variable manufacturing (based on production)

Direct materials $1000

Direct labor 2000

Variable overhead 3000 $6000

Fixed manufacturing 8000

Variable Selling & Administrative costs (based on sales) 3,200

Fixed Selling & Administrative costs 2,000

Note: There are no ending balances in Direct Materials, Work in Process, or Finished Goods.

REQUIRED:

1. Prepare an income statement for 2017, using absorption costing (traditional format).

2. Prepare an income statement for 2017, using variable costing (contribution margin format).

3. Explain under what circumstances a company should use one statement versus the other.

36. In a standard cost system, the manufacturing overheadallocated to production equals the standard overhead allocationrate multiplied by the standard quantity of the allocation baseallowed for expected output.

True

False

37. The direct materials cost and efficiency variances make upthe total direct materials variance.

True

False

41. Which of the following statements is true of absorptioncosting?

A) It considers variable selling and administrative costs asproduct costs.

B) It considers fixed selling and administrative costs asproduct costs.

C) It considers fixed manufacturing overhead cost as productcosts.

D) It considers variable manufacturing overhead cost as periodcosts.

42) Which of the following is true of the traditional format ofthe income statement?

A) It is prepared under the variable costing method.

B) It shows contribution margin as a line item.

C) It is not allowed under GAAP.

D) It is prepared under the absorption method.

43) Unit product cost calculations using absorption costing donot include ________.

A) fixed manufacturing overhead

B) variable manufacturing overhead

C) variable selling and administrative costs

D) direct materials

QUESTION# 3 Zhou Inc. has the following cost data for its past year of operations. Zhou Inc. produces tables and sells them for $150 each. You must show all your work in order to receive all the points available.

$$/ Per unit

Variable Costs:

Direct Materials (DM) $25

Direct Labour (DL) $20

Variable Mf’g Overhead $ 5

Variable Selling & Admin $10

Total Variable costs $60

Fixed Costs:

Fixed Mf’g Overhead $360,000

Fixed Selling & Admin $200,000

Total Fixed Costs $560,000

Unit data

Beginning Inventory 0

Units produced 12,000

Units sold 10,000

Required:

1) Calculate the unit cost per table under Variable Costing.

2) Calculate the unit cost per table under Absorption Costing.

3) Prepare a Contribution Margin format Income Statement using Variable Costing.

4) Prepare a Traditional format income statement using Absorption Costing.

5) Explain why the operating incomes were not the same under the different cost flow assumptions? And reconcile the difference in operating income.

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