Question

Hello, are you able to assist with the below?

Fancy Foot Cat Biscuits Company manufactures cat treats. The company has the
following actual data for January and February 20xx.
January February
Beginning inventory in kilograms 0 2,000
Production in kilograms 20,000 20,000
Sales in kilograms 18,000 21,000
Variable manufacturing costs per unit produced $8 $8
Variable marketing costs per unit sold $2 $2
Fixed manufacturing costs $30,000 $30,000
Fixed marketing costs $5,000 $5,000

The selling price per kilogram is $20.00. The budgeted level of production used to
calculate the budgeted fixed manufacturing cost per unit is 20,000 kilograms. There
is no price, efficiency or spending variance. Any production-volume variance is
written off to cost of goods sold in the month in which it occurs.

1. Prepare the January and February income statements for Fancy Foot Cat
Biscuits under: a) variable costing and b) absorption costing

2. Prepare a numerical reconciliation and explanation of the difference in the
income each month between variable costing and absorption costing.

Answer 1

1.

Variable costing:

	Per Unit/Per period	Year 1	Year 2
Unit sold		18,000	21,000
Sales	$20	$360,000	$420,000
Less: variable expense
Variable cost of goods sold	$8	$144,000	$168,000
Variable selling and administrative	$2	$36,000	$42,000
Total variable expenses		$180,000	$210,000
Contribution margin (Sales - Total Variable Cost)		$180,000	$210,000
Fixed expenses:
Fixed manufacturing overhead		$30,000	$30,000
Fixed selling and administrative		$5,000	$5,000
Total Fixed expenses		$35,000	$35,000
Net operating income [Contribution - Fixed cost]		$145,000	$175,000

____________________________________________________________

Absorption costing:

		Year 1	Year 2
Unit produced (A)	Per unit	20,000	20,000
Variable manufacturing cost	$8	$160,000	$160,000
Fixed manufacturing overhead		$30,000	$30,000
Total manufacturing cost (B)		$190,000	$190,000
Unit product cost (B/A)		$9.50	$9.50
Fixed overhead per unit		$1.50	$1.50

Absorption Costing Income statement:

		Year 1	Year 2
Units sold	Per unit	18000	21000
Sales	$20	$360,000	$420,000
COGS (W.N)		($171,000)	($199,500)
Gross margin		$189,000	$220,500
Selling and administrative expenses (Fixed + Variable)		($41,000)	($47,000)
Net operating income		$148,000	$173,500

Working Note:

Compute COGS

		Year 1	Year 2
Opening balance		-	2,000
Units produced		20,000	20,000
Units sold		18,000	21,000
Ending inventory		2,000	1,000
Opening balance		0	$19,000
Add: Cost of production		$190,000	$190,000
Less: Ending inventory		($19,000)	($9,500)
COGS		$171000	$199,500

________________________________________________________________

2.

Reconciliation	Year 1	Year 2
Variable costing Net Operating Income	$145,000	$175,000
Add: Fixed manufacturing overhead deferred in inventory under absorption costing
([Closing - Opening] inventory) × Fixed manufacturing overhead per unit produced	$3,000	($1,500)
	(2000 × $1.5)	(-1000 × $1.5)
Absorption costing net operating income	$148,000	$173,500