Question

each. The company uses a fore manufacturing overhead location rate of 55 per game. Assume al cos data are from Game Play's first two months in business during 2018 and production levels are exactly as planned. The Requirements Data Table 2.800 units Compute the product cost per game produced under absorption costing and under variable casting Prepare monthly income statements for October and November, including columns for each month and a column, using these costing methods absorption costing b. variable costing is operating income higher under absorption costing or variable costing in October in November? Explan the pace of differences in operating income based on absorption costing versus variable costing Determine the balance in Finished Goods inventory on October 31 and November 30 under absorption costing and variable casting Compare the cesine balances and therences in orang nome Explain the differences in inventory balances based on sorption con versus variable coming Variate mandacturing cost per game Sales commission cost per Game Toralfred manufacturing overhead d a o Done

Answer 1

Part 1

	Absorption Costing	Variable Costing
Variable manufacturing cost	12	12
Fixed manufacturing overhead($12000 / 2,400 units)	5
Total unit cost	17	12

Part 2 A absorption costing

GAME PLAY

Income Statement

Months Ended October 31 and November 30, 2018

	October	November	Total
Units Sold	2000	2800	4800
Sales Revenue (units sold*36)	72000	100800	172800
Cost of Goods Sold (units sold * 17)	34000	47600	81600
Gross Profit	38000	53200	91200
Selling & Administrative Costs (5*X + 7500)	17500	21500	39000
Operating Income	20500	31700	52200

Part 2 B variable costing

GAME PLAY

Contribution Margin Income Statement

Months Ended October 31 and November 30, 2018

	October	November	Total
Units Sold	2000	2800	4800
Sales Revenue (units sold*36)	72000	100800	172800
Variable Costs (units sold * (12+5))	34000	47600	81600
Contribution Margin	38000	53200	91200
Fixed costs (12000+7500)	19500	19500	39000
Operating Income	18500	33700	52200

Part 3

In October, the operating income is higher under absorption costing in October. The primary reasons for this is that fixed manufacturing overhead costs are distributed across the entire production run as the part of the unit cost. Under the absorption costing $2000 of fixed manufacturing costs are not expensed and remain in Finished Goods Inventory

In November, the operating income is higher under variable costing. The primary reasons for this is because $2000 of fixed manufacturing overhead that is contained in the units in ending inventory under absorption costing is not contained in the units of ending inventory under variable costing. As inventory declines, as was the case in November, October’s fixed manufacturing overhead costs that absorption costing assigned to that inventory are expensed in November. This decreases November’s absorption costing income.

The unit product cost is different under absorption and variable costing. Under variable costing, fixed manufacturing costs are considered as the period costs. Under absorption costing, fixed manufacturing costs are considered as the product cost and are allocated according to number of units sold.

Part 4

	October	November
Beginning Balance (in units)	0	400
+ Units Produced	2400	2400
– Units Sold	2000	2800
Ending Balance	400	0

	Absorption costing		Variable costing
	October	November	October	November
Ending inventory	6800(400*17)	0	4800 (400*12)	0

The higher inventory balance under absorption costing is representative of the fixed costs that are expensed in variable costing, but contained in inventory under absorption costing. Under absorption costing, the difference in the product cost per game is contained in the inventory, whereas under variable costing, the difference in the product cost per game is expensed as a period cost