Question

Consider the following information:

	Q1	Q2	Q3
Beginning inventory (units)	0	2,000	1,000
Budgeted units to be produced	300,000	300,000	300,000
Actual units produced	296,000	301,000	302,000
Units sold	294,000	302,000	302,000
Variable manufacturing costs per unit produced	$40	$40	$40
Variable selling costs per unit sold	$10	$10	$10
Fixed manufacturing costs	$3,000,000	$3,000,000	$3,000,000
Fixed selling costs	$1,000,000	$1,000,000	$1,000,000
Selling price per unit	$70	$70	$70

There are no price, efficiency, or spending variances, and any production-volume variance is directly written off to cost of goods in the quarter in which it occurs.

a) Prepare income statements for Q1, Q2, and Q3 using variable costing and absorption costing.

b) Explain the differences in operating income between the two costing systems for each quarter. Be specific!

Answer 1

Travelbook classics total Sales cost of goods sold constribution margin ordering and delivery processing rent allocated corporate costs net operating income 100000 65000 35000 21000 1000 7000 6000 40000 20000 20000 8000 3000 7000 2000 140000 85000 55000 29000 4000 14000 8000 total cost before the decision total cost after the discontinaution differential cost 195000 132000 63000 Cookbook Classics total sales cost of goods sold contribution margin order and processing cost rent allocated corporate costs 60000 36000 24000 18000 2000 7000 40000 20000 20000 8000 3000 7000 100000 56000 44000 26000 5000 14000 net operating income -3000 2000 - 1000 total cost before the decision total cost after the discontinaution differential cost 195000 110000 85000 LAND LAND IMPROVEMENTS 1 100000 50000 2 10000 20000 26000 BUILDINGS 3000000 15000 EQUIPMENT 600000 6000 5000 OTHER AS: 12000 25000 12000 500 49500 TOTAL $ 110000 96000 3015000 611000 INCOME STATEMENT (ABSORPTION COSTING) Q1 Q2 Q3 294000 302000 302000 20580000 21140000 21140000 SALES UNITS SALES REVENUE LESS COST OF GOOD SOLD OPENING INVENTORY*40$ COST OF GOOD MANUFCRED COST OF GOOD AVAILABLE LESS CLOSING INVENTORY 80000 40000 11840000 12080000 12080000 11840000 12160000 12120000 80000 40000 11760000 12120000 12120000 8820000 9020000 9020000 GROSS PROFIT FIXED MANUFACTURING FIXED SELLING COST VARIABLE SELLING COST 3000000 1000000 2940000 3000000 3000000 1000000 1000000 3020000 3020000 NET OPERATING INCOME 1880000 2000000 2000000 INCOME STATEMENT (VARIABLE COSTING) Q1 Q2 Q3 20580000 21140000 21140000 SALES LESS VARIABLE COST OFGOODS OPENING INVENTORY 80000 40000 VARIABLE COST OF GOOD 11840000 12080000 12080000 MANUFACTURED VARIABLE COST OF GOODFOR 11840000 12160000 12120000 SALE LESS CLOSING INVENTORY 80000 40000 GROSS CONTRIBUTION MARG 11760000 12120000 12120000 LESS VARIABLE SELLING COST 2940000 3020000 3020000 CONTRIBUTION MARGIN 8820000 9100000 9100000 LESS PERIOD EXPENSE FIXED MANUFACTURING FIXED SELLING COSTS 3000000 1000000 3000000 1000000 3000000 1000000 NET OPERATING INCOME 4820000 5100000 5100000 In Q1 net operating income under variable costing is lot more which is $2940000 more operating income In Q2 net operating income under variable costing is $3100000 more income In Q3 net operating income under variable costing is $3100000 more income The difference in absorbtion costing operating income and variable costing income is solely in treatment of fixed manufacturing overhead and income presentation.