Question

Variable and absorptioncosting;explaining operating-incomedifferences.TCMotorsassembles and sells motor vehicles, and uses standard costing. Actual data relating to April and May 2015 are

Chapter 8 Nascar Motors assem which unit costs are are: bles and sells motor vehicles. It uses an actual costing system in calculated each month. Data relating to April and May of 2016 1. April May Units Data: Beginning inventory Production Sales (Units) Selling price per vehicle 500 350 $24,000 150 400 520 $24,000 Variable cost data: Manufacturing costs per unit produced $10,000 Marketing costs per unit sold $10,000 $3,000 $3,000 Fixed cost data: Manufacturing costs Marketing costs 2,000,000 $600,000 $2,000,000 $600,000 Required i. Prepare the income statement for Nascar Motors in April and May of 2016 under: a. Variable costing. b. Absorption costing. Prepare a numerical reconciliation of the variable and absorption costing operating income figures for each month. ii. ii. Provide a brief explanation of the difference between the operating income for each month under variable costing and absorption costing

The selling price per vehicle is $24,000. The budgeted level of production used to calculate the budgeted fixed manufacturing cost per unit is 500 units. There are no price, efficiency, or rate variances. Any produc- tion-volume variance is written off to cost of goods sold in the month in which it occurs.
Required
1. Prepare April and May 2015 statements of comprehensive income for TC Motors under (a) variable costing and (b) absorption costing.
2. Prepare a numerical reconciliation and explanation of the difference between operating income for each month under variable costing and absorption costing.

Answer 1

Construct The Variable Costing Income Statement under FIFO
				April		May
Sales					8,400,000		12,480,000
Less: Variable cost
variable cost of goods sold				3,500,000		5,200,000
Variable selling expense				1,050,000	4,550,000	1,560,000	6,760,000
Contribution margin					3,850,000		5,720,000
Fixed expense:
Fixed Manufacturing overheads					2,000,000		2,000,000
Fixed selling expense					600,000		600,000
Net operating Income					1,250,000		3,120,000
Construct The Absorption Costing Unit Product Cost
				April	May
Variable Manufacturing Cost				10,000	10,000
Fixed Manufacturing overheads				4,000.00	5,000.00
Absorption costing unit prroduct cost				14,000.00	15,000.00
Construct the Absorption Costing Income Statement Under FIFO
				April	May
Sales				$8,400,000	$12,480,000
Cost of Goods sold				4900000	7650000
Gross Margin				$3,500,000	$4,830,000
Selling and distribution expense				1,650,000	2,160,000
Net operating income				1,850,000	2,670,000
Reconciliation Statement:
April
Income as per Vvariable costing				1250000
Add: Fixed OH deferred				600000
(150 units @4000)
Income as per Absorption costing				1850000
may:
Income as per Absorption costing				3120000
Less: Fixed oh released				600000
Add: Fixed OH deferred for 30 units				150000
(30 units @ 5000)
Income as per Absorption costing				2670000
The difference in income of two costing is due to ending inventory.
When the ending inventory increases the fixed OH deferrred in Absorption costing, resulting in higher income than variable costing.
When the level of ending inventory falls, the fixed OH released resulting in lower income than variable costing.