Question

i Requirements 1. Prepare April and May 2017 income statements for FastTrack 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 Print Done

Answer 1

Fast Track Motors Key inputs for income statement computations are Apr-17 May-17 Beginning inventory 50 Production 500 450 Goods available for sale 500 500 Units sold 450 470 Ending inventory 50 30 The budgeted fixed cost per unit and budgeted total manufacturing cost per unit under absorption costing are Apr-17 May-17 Budgeted fixed manufacturing costs 2400000 2400000 Budgeted production 500 Budgeted fixed manufacturing cost per unit 4800 4800 Budgeted variable manufacturing cost per unit 11500 11500 Budgeted total manufacturing cost per unit 16300 16300 500 a.Variable costing Apr-17 10350000 May-17 10810000 Revenues Variable costs Beginning inventory Variable manufacturing costs Cost of goods available for sale Deduct ending inventory Variable cost of goods sold Variable operating costs Total variable costs Contribution margin Fixed costs: Fixed manufacturing costs Fixed operating costs Total fixed costs Operating income 5750000 5750000 -575000 5175000 1620000 575000 5175000 5750000 -345000 5405000 1692000 6795000 3555000 7097000 3713000 2400000 800000 2400000 800000 3200000 355000 3200000 513000 $23,000 x 450; $23,000 x 470 $11,500 x 500; $11,500 x 450 $11,500 x 50; $11,500 x 30 $3,600 x 450; $3,600 x 470

(b) Absorption costing Apr-17 10350000 May-17 10810000 0 5750000 2400000 8150000 -815000 Revenues Cost of goods sold Beginning inventory Variable manufacturing costs Allocated fixed manufacturing costs Cost of goods available for sale Deduct ending inventory Adjustment for prod.-vol. variance Cost of goods sold Gross margin Operating costs Variable operating costs Fixed operating costs Total operating costs Operating income 815000 5175000 2160000 8150000 -489000 240000 U 7901000 2909000 0 7335000 3015000 1620000 800000 1692000 800000 2420000 2492000 417000 595000 $3,600 x 450; $3,600 x 470 $16,300 x 50; $16,300 x 30 $2,400,000 - $2,400,000; $2,400,000 - $2,160,000 $4,800 x 500; $4,800 x 450 Requirement 2 - Absorption Costing Operating Income Variable Costing Operating Income Fixed Manufacturing costs in ending inventory Fixed Manufacturing costs in beginning inventory April 595000 355000 : - 0 (4800 x 50 ) 240000 240000 April 417000 - 513000 (4800 x 30) - ( 4800 x 50) -96000 144000 240000 -96000 -96000 The difference between absorption and variable costing is due solely to moving fixed manufacturing costs into inventories as inventories increase (as in April) and out of inventories as they decrease (as in May).