Question

Variable her. its blueberry crop was 5-42. Absorption and Variable Costing Comparisons Red Arrow Blueberries manufactures blueberry jam. Because of bad weather, its blueberr small. The following data have been gathered for the summer quarter of 2017: 9,000 8,700 Beginning inventory (cases).. Cases produced...... Cases sold .............. Sales price per case. . . . . ... Direct materials per case...... Direct labor per case ............... Variable manufacturing overhead per case...... Total fixed manufacturing overhead. Variable selling and administrative cost per case ..... Fixed selling and administrative cost... $300,000 $48,000 Required a. Prepare a functional income statement for the quarter using absorption costing. b. Prepare a contribution income statement for the quarter using variable costing. c. What is the value of ending inventory under absorption costing? d. What is the value of ending inventory under variable costing? e. Reconcile the difference in ending inventory under absorption costing and variable costing. 3. Variable and Absorntion Costing with High T C 1 I . Laluding

Answer 1

Absorption Costing Income Statement $ 522,000 $ $ Sales (8700* $ 60 ) Less: Cost of Goods Sold Total Manufacturing Costs Less : Ending Inventory Gross Margin Less : Non Manufacturing expenses Variable selling and administrative expenses (8700*$2) Fixed selling and administrative expenses Net Income ( loss) 480,000 (16,000) $ $ (464,000) 58,000 $ $ (17,400) (48,000) $ $ (65,400) (7,400) Working Notes Total manufacturing cost Direct Material (9000 *$8) Direct Labour (9000 * $9) Variable Manufacturing overhead ( 9000 * $3) Fixed manufacturing overhead Total manufacturing cost $ $ $ $ $ 72,000 81,000 27,000 300,000 480,000 Ending Inventory = 9000-8700 = 300 units Value of ending inventory = $ 480000/9000*300= $ 16,000

Variable Costing Income Statement $ 522,000 Sales (8700* $ 60) Less : variable costs $ $ $ $ (69,600) (78,300) (26,100) (17,400) Direct Material ( 8700 * $8) Direct Labour ( 8700 * $9) Variable Manufacturing Overhead ( 8700 * $3) Variable Selling expenses ( 8700*2) Total Variable Costs Contribution Margin Less : Fixed Costs Fixed Manufacturing Overhead Fixed selling and administrative expenses Net Income ( loss) $ $ (191,400) 330,600 $ $ (300,000) (48,000) $ $ (348,000) (17,400)

Value of ending inventory under absorption costing $ 16,000.00 Total Manufacturing costs Total Units produced Units Sold Ending Units $ 480,000.00 9000 8700 300 Value of ending inventory = $ 480000/9000*300= $ 16,000 Value of ending inventory under variable costing $ 6,000.00 Manufacturing cost per unit = $ 8 $ 9+ $ 3 = $ 20.00 Value of the ending inventory = 300 * $ 20 $ 6,000 $ 16,000 Ending inventory - Absorption costing Less : Fixed manufacturing overhead absorbed in the ending inventory under absoption costing ( $ 300000/9000*300) Ending Inventory - Variable Costing $ (10,000) 6,000 S

Under the absorption costing system, Fixed manufacturing costs are treated as product costs, whereas under variable costing system, fixed manufacturing costs are treated as period costs. Hence the difference between value of inventory under these two systems arises due to absoption of fixed manufacturing costs.