Question

þ- ZB Toys started 2017 with no inventories. During the year, its expected and actual production was 30,000 units, of which it sold 24,000 units at $50 each. Cost data for the year is as follows: Manufacturing costs incurred: Variable: $525,000 Fixed: $372,000 Marketing costs incurred: Variable: $144,800 Fixed: $ 77,400 Calculate ZB Toys's operating income under (a) variable costing and (b) absorption costing. Explain why operating income differs under the two approaches. (40 marks)

Answer 1

х 7- Income Statement - Microsoft Excel (Product Activation Failed) File Home Insert Page Layout Formulas Data Review View X E4 А B с D E F H J K L 1 2 1st Quarter 3 4 Beginning Inventory Total Number of units produced Less: Total Number of units Sold Ending Inventory 5 30,000 (24,000) 6,000 6 7 8 Now, under absorption costing, Ending Inventory would be measured by Number of units of Closing Inventory x Cost of Production / Number of units produced Under Variable costing, Ending Inventory would be measured by Number of units of Closing Inventory x Total Variable cost / Number of units produced 9 10 11 12 13 14 Total Cost $ 1,200,000.00 15 16 17 18 ZB TOYS Absorption Costing Budgeted Income Statement For the Year Units Rate Per unit Sales 24,000 $ 50.00 Less: Cost of Goods sold : Variable Production Cost 30,000 $ 17.50 $ Fixed Production Cost $ 12.40 $ Cost of Goods Manufactured 30,000 $ 29.90 $ Less: Ending Inventory (6,000) $ 29.90 $ Cost of Goods sold 24,000 $ 29.90 Gross Profit 24,000 $ Less: Marketing Expenses : Fixed $ Variable $ Net Selling & Administration Cost Operating Income 525,000.00 372,000.00 897,000.00 (179,400.00) 19 20 21 22 $ $ 20.10 (717,600.00) 482,400.00 23 24 25 26 77,400.00 144,800.00 $ $ (222,200.00) 260,200.00 27 28 29 Sheet22 Sheet23 Sheet24 Sheet25 Sheet26 Sheet27 Sheet28 Sheet29 Sheet30 Sheet31 KI Ready BOI 100% 6:50 AM 17-Sep-20

х XI - 2-- Income Statement - Microsoft Excel (Product Activation Failed) File Home Insert Page Layout Formulas Data Review View ♡ X H50 E F H 1 J K L 30 31 32 33 Units Total Cost $ 1,200,000.00 34 35 36 $ $ 37 А B с D ZB TOYS Variable Costing Budgeted Income Statement For the Year Rate Per unit Sales 24,000 $ 50.00 Less: Variable Cost : Variable Cost of Goods Manufactured 30,000 $ 17.50 Less : Ending Inventory (6,000) $ 17.50 Variable Cost of Goods Sold 24,000 $ 17.50 Variable Selling Expenses Total Variable Cost Contribution Margin Less: Fixed Costs Manufacturing Costs Marketing Costs Total Fixed Cost Operating Income 525,000.00 (105,000.00) 420,000.00 144,800.00 38 $ $ 39 40 $ $ (564,800.00) 635,200.00 41 42 43 44 $ $ 372,000.00 77,400.00 45 $ $ (449,400.00) 185,800.00 46 47 48 Reconciliation Statement 49 50 51 Operating Income as per Absorption Costing Less: Fixed Production Cost absorbed to Ending Inventory (6,000 x $ 12.40) Operating Income as per Variable Costing 260,200.00 (74,400.00) 185,800.00 52 53 54 55 56 57 The reason behind the difference in Operating Incomes of both the methods can be understand from Reconciliation Statement. Under Variable Costing Income Statement, Fixed Manufacturing Cost are considered for the year and hence, it is not apportioned to Number of Units Produced. Under Absorption Costing Income Statement, Fixed Manufacturing Cost is apportioned to Number of Units produced in that year. Due to which under Variable Costing, Fixed Cost is not apportioned to any units of Ending Inventory, resulting in Less Operating Income. But, under Absorption Costing, Fixed cost is apportioned to Ending Inventory, due to which its Operating Income is more. Sheet22 Sheet23 Sheet24_Sheet25 Sheet26 Sheet27 Sheet28 Sheet29 Sheet30 Sheet31 BO. 100% 58 KI Ready 6:53 AM 17-Sep-20

Formula Sheet :

х XI - 2-- Income Statement - Microsoft Excel (Product Activation Failed) File Home Insert Formulas Data Review View ♡ DE X Page Layout foc H17 А B с D E F H 1 2 1st Quarter 3 Beginning Inventory 0 4 Total Number of units produced 30000 5 Less: Total Number of units Sold - 24000 6 Ending Inventory =SUM(C3:05) 7 8 Now, under absorption costing, Ending Inventory would ! 9 Under Variable costing, Ending Inventory would be measi 10 11 ZB TOYS 12 Absorption Costing Budgeted Income Statement 13 For the Year 14 Units Rate Per unit 15 Sales =-C5 50 16 Less: Cost of Goods sold : 17 Variable Production Cost =+C4 =+ROUND(E17/C17,2) 525000 18 Fixed Production Cost =+ROUND (E18/C17,2) 372000 19 Cost of Goods Manufactured =+C17 =+E19/019 =SUM(E17:E18) 20 Less: Ending Inventory =-C6 =+D19 =+C20*D20 21 Cost of Goods sold =SUM(C19:C20) =-F21/C21 22 Gross Profit =+C15 =+D15-D21 23 Less: Marketing Expenses : 24 Fixed 77400 25 Variable 144800 26 Net Selling & Administration Cost 27 Operating Income 28 Total Cost =+C15*D15 =-SUM(E19: E20) =SUM(F15: F21) =-SUM(E24: E25) =SUM(F22:F26) 29 Sheet22 Sheet23 Sheet24 Sheet25 Sheet26 Sheet27 Sheet28 Sheet29 Sheet30 Sheet31 KI Ready BOL 100% 6:54 AM 17-Sep-20

х ♡ DE X F H Total Cost =+C34*D34 XI - 95 Income Statement - Microsoft Excel (Product Activation Failed) File Home Insert Page Layout Formulas Data Review View H46 foc А B C D E 30 =+A11 31 Variable Costing Budgeted Income Statement 32 =+A13 33 Units Rate Per unit 34 Sales =-C5 =+015 35 Less: Variable Cost : 36 Variable Cost of Goods Manufactured =+C4 =+ROUND(E36/C36,2) 525000 37 Less : Ending Inventory =-C6 =+D36 =+C37*D37 38 Variable Cost of Goods Sold =SUM(C36:C37) =+E38/C38 =SUM(E36:37) 39 Variable Selling Expenses 144800 40 Total Variable Cost 41 Contribution Margin 42 Less: Fixed Costs 43 Manufacturing Costs 372000 44 Marketing Costs 77400 45 Total Fixed Cost 46 Operating Income 47 48 Reconciliation Statement =-SUM(E38: E39) =SUM(F34:F40) =-SUM(E43: E44) =SUM(F41: F45) 49 50 =+F27 =+C20*D18 =SUM(F50:F51) 52 Operating Income as per Absorption Costing 51 Less: Fixed Production Cost absorbed to Ending Inventory (6,4 Operating Income as per Variable Costing 53 54 The reason behind the difference in Operating Incomes 55 Under Variable Costing Income Statement, Fixed Manufact 56 Under Absorption Costing Income Statement, Fixed Manufa 57 Due to which under Variable Costing, Fixed Cost is not 58 But, under Absorption Costing, Fixed Cost is apportion K™ Sheet22 Sheet22 Sheet23 Sheet24 Sheet25 Sheet26 Sheet27 Sheet28 Ready Sheet29 Sheet30 Sheet31 D BOU 100% - 6:54 AM 17-Sep-20

For any queries please comment

If you are satisfied with the solution, please click the LIKE THUMB.