Question

Obj. 1,2 PR 20-3A Absorption and variable costing income statements for two months and analysis 1. Income from During the first month of operations ended July 31, Western Creations Company produced operations. 5847.000 80.000 designer cowboy hats, of which 72,000 were sold. Operating data for the month are summarized as follows: $4,320,000 SHOW VI Sales Manufacturing costs: Direct materials ..... Direct labor Variable manufacturing cost ..... Fixed manufacturing cost .......... Selling and administrative expenses: Variable ...... Fixed $1,600,000 1,440,000 240,000 320,000 3,600,000 $ 144,000 25,000 169,000 During August, Western Creations produced 64,000 designer cowboy hats and sold 72,000 cowboy hats. Operating data for August are summarized as follows: $4,320,000 Sales ... . Manufacturing costs: Direct materials ... Direct labor ......... Variable manufacturing cost ..., Fixed manufacturing cost ... Selling and administrative expenses: Variable ...... Fixed ..... $1,280,000 1.152,000 192,000 320,000 2.944,000 $ 144,000 25.000 169,000

Answer 1

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Q.No.1 Western Creations Company Income statement under Absorption Costing July 72,000 80,000 8,000 $60 August 72,000 64,000 Sales units Production units Closing stock Selling price per unit $60 $4,320,000 $4,320,000 Sales Less: Cost of Goods Sold Opening Stock Variable Cost of Goods manufactured Fixed Manufacturing cost $3,280,000 $320,000 $3,600,000 $360,000 $360,000 $2,624,000 $320,000 $3,304,000 $0 Less: Closing stock $3,240,000 $3,304,000 $3,240,000 $1,080,000 $3,304,000 $1,016,000 Total Cost of Goods Sold Gross profit Less: Selling and administration Cost Variable sales and administration expense Sales and administration-Fixed Cost $144,000 $25,000 $144,000 $25,000 Net Profit $911,000 $847,000 Q.No.2 Western Creations Company Income statement under Variable Costing July 72,000 80,000 8,000 $60 August 72,000 64,000 Sales units Production units Closing stock Selling price per unit $60 $4,320,000 $4,320,000 Sales Less: Cost of Goods Sold Opening Stock Variable Cost of Goods manufactured $3,280,000 $3,280,000 $328,000 $328,000 $2,624,000 $2,952,000 $2,952,000 $144,000 $2,952,000 $144,000 Less: Closing Stock Variable Cost of Goods Sold Variable sales and administration expense ( $2 per unit sold) Total Variable Cost Contribution Less : Fixed cost Manufacturing overheads Selling and administrative $3,096,000 $1,224,000 $3,096,000 $1,224,000 $320,000 $25,000 $320,000 $25,000 Net Profit (Contribution - Fixed Cost) $879,000 $879,000 Q.No.3 August $879,000 Reconciliation of Profit Variable Costing and Absorption Costing July Profit as per Variable Costing $879,000 Add: Difference in closing stock Closing stock as per Variable costing $328,000 Closing stock as per Absorption costing $360,000 Difference $32,000 Less: Difference in Opening stock Opening stock as per Variable Costing Opening stock as per Absorption Costing Difference $328,000 $360,000 $32,000 Profit as per Absorption costing $911,000 $847,000 In July month Closing stock carries a portion of fixed cost hence there is more profit in absorption costing But this July closing stock is consumed in August month and less lower profit in August month compared to variable costing Profit is same in Variable costing for both month because fixed cost is treated as period cost Q.No.4 Overall profit is same irrespective of month. It depends on how income statement is presented In Absorption Costing profit is higher in one period offset by lower profit in another period due to difference in stock In Variable Costing profit each month is same since Fixed Cost is charged to the period in which it is incurred