Question

Obj. 1.2 ✓ 1. B. Income from operations, $847,000 PR 20-3A Absorption and variable costing income statements for two months and analysis During the first month of operations ended July 31, Western Creations 80.000 designer cowboy hats, of which 72,000 were sold. Operating data for summarized as follows: tions Company produced data for the month are SHOW ME HOW $4,320,000 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 $3,240,000 $360,000 $2,624,000 $320,000 $3,304,000 $0 $3,304,000 Less: Closing stock $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 Fixed Sales and administration Total Fixed cost Net Operating Income $144,000 $25,000 $169,000 $911,000 $144,000 $25,000 $169,000 $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 Less: Closing Stock Variable Cost of Goods Sold Variable selling and administration expense $328,000 $3,280,000 $2,624,000 $3,280,000 $2,952,000 $328,000 $2,952,000 $2,952,000 $144,000 $144,000 $3,096,000 $1,224,000 $3,096,000 $1,224,000 Total Variable Cost Contribution Margin Less : Fixed cost Manufacturing overheads Selling and administrative $320,000 $25,000 $320,000 $25,000 Net Operating Income $879,000 $879,000 Q.No.3 Reconciliation of Operating Income Variable Costing and Absorption Costing July August Operating Income as per Variable Costing $879,000 $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 Operating Income as per Absorption costing $911,000 $847,000 3 (a) In July month Absorption Costing Income Statement Closing stock carries a portion of fixed cost hence there is more Operating Income in absorption costing 3 (6) But this July closing stock is consumed in August month in Absorption costing and less lower Operating Income in August month compared to variable costing Operating Income is same in Variable costing for both month because fixed cost is treated as period cost Q.No.4 Overall Operating Income is same irrespective of month. It depends on how income statement is presented In Absorption Costing Operating Income is higher in one period offset by lower Operating Income in another period due to difference in closing stock valuation In Variable Costing Operating Income each month is same since Fixed Cost is charged to the period in which it is incurred