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Race Track Motors assembles and sells motor vehicles and uses standard costing Actual data relating to April and May 2017 are

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Answer #1

Solution of the above question is as under:

A) Income Statement for April 2017 And May 2017:
a) Absorption Costing Income Statement
Race Track Motors
Income Statement (Absorption Costing)
Apr-17 May-17
Particulars Amount($) Amount($)
Sales(450 Units * $30000)//(420 Units * $30000) 13500000 12600000
Less: Cost of Goods Sold:
Opening Inventory (0 Units * $15400^)//(50 Units * $16500^^) 0 825000
Add: Cost of Goods Produced(500 Units * $15400)//(400 Units * $16500) 7700000 6600000
Cost of Goods Available for Sale 7700000 7425000
Less: Closing Inventory(50 Units*$15400)//(30 Units*$16500) 770000 6930000 495000 6930000
Gross Profit 6570000 5670000
Less: Selling and Administration Expenses
Variable Selling and Administration Expenses(450 Units*$2000)//(420 Units*$2000) 900000 840000
Fixed Selling and Administration Expenses 750000 1650000 750000 1590000
Net Operating Income 4920000 4080000
^ Manufacturing Expenses per Unit ^^ Manufacturing Expenses per Unit
Variable Expenses + Fixed Manufacturing Overhead Expenses Variable Expenses + Fixed Manufacturing Overhead Expenses
$11000 + ($2200000/500 Units) $11000 + ($2200000/400 Units)
$11000 + $4400 $11000 + $5500
$15,400 $16,500
b) Variable Costing Income Statement
Race Track Motors
Income Statement (Variable Costing)
Apr-17 May-17
Particulars Amount($) Amount($)
Sales(450 Units * $30000)//(420 Units * $30000) 13500000 12600000
Less: Cost of Goods Sold:
Opening Inventory (0 Units * $11000)//(50 Units * $11000) 0 550000
Add: Cost of Goods Produced(500 Units * $11000)//(400 Units * $11000) 5500000 4400000
Variable Cost of Goods Available for Sale 5500000 4950000
Less: Closing Inventory(50 Units*$11000)//(30 Units*$11000) 550000 4950000 330000 4620000
Gross Contribution Margin 8550000 7980000
Less: Variable Selling and Administration Expenses (450*$2000)//(420*$2000) 900000 840000
Contribution Margin 7650000 7140000
Less: Period Expenses
Fixed Manufacturing Overheads 2200000 2200000
Fixed Selling and Administration Expenses 750000 2950000 750000 2950000
Net Operating Income 4700000 4190000
Reconciliation to explain the difference between Net Operating Income
Apr-17 May-17
Particulars Amount ($) Amount ($)
Net Operating Income under Absorption Costing 4920000 4080000
Net Operating Income under Variable Costing 4700000 4190000
Difference in Net Operating Income 220000 -110000
Change in Inventory (Closing - Opening) 50 Units 20 Units

Fixed Manufacturing Overhead Deferred in Inventory (50 Units * $ 4400)/ Fixed Manufacturing Overhead Expenses released from Inventory (20 Units* $5500)

220000 -110000

Reason for Difference in Net Operating Income

In the Month of April 2017, the net operating income under Absorption Costing is $220000 more than the net operating income under Variable Costing because when production is more than sales, the fixed manufacturing overhead is deferred in Inventory that causes a higher Net Operating Income under Absorption Costing than under Variable Costing.

In the Month of May 2017, the net operating income under Absorption Costing is $110000 less than the net operating income under Variable Costing because when production is less than sales, the fixed manufacturing overhead is released from Inventory that causes a lower Net Operating Income under Absorption Costing than under Variable Costing.

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