Question

Chenango Can Company manufactures metal cans used in the food-processing industry. A case of cans sells for $25. The variable costs of production for one case of cans are as follows: Direct material Direct labor Variable manufacturing overhead $ 6.00 3.00 5.00 Total variable manufacturing cost per $14.00 case Variable selling and administrative costs amount to $.50 per case. Budgeted fixed manufacturing overhead is $400,000 per year, and fixed selling and administrative cost is $40,500 per year. The following data pertain to the company's first three years of operation. (A unit refers to one case of cans.) Planned production (in units) Finished-goods inventory (in units), January 1 Year 1 Year 2 Year 3 80,000 80,000 80,000 0 0 23,000 80,000 80,000 80,000 80,000 57,000 91,500 0 23,000 11,500 Actual production (in units) Sales (in units) Finished-goods inventory (in units), December 31 Actual costs were the same as the budgeted costs. Required: 1. Prepare operating income statements for Chenango Can Company for its first three years of operations using: a. Absorption costing:

Answer 1

1. a. Absorption costing:

Unit product cost = Variable manufacturing cost + Fixed manufacturing cost = $ 14 + $ 400,000 / 80,000 = $ 19.

	Year 1	Year 2	Year 3
Sales	$ 2,000,000	$ 1,425,000	$2,287,500
Cost of Goods Sold	1,520,000	1,083,000	1,738,500
Gross Profit	$ 480,000	$ 342,000	$ 549,000
Selling and Administrative Expenses
Variable	40,000	28,500	45,750
Fixed	40,500	40,500	40,500
Total Selling and Administrative Expenses	80,500	69,000	86,250
Net Operating Income	$ 399,500	$ 273,000	$ 462,750

b. Variable costing:

Unit product cost = $ 14

	Year 1	Year 2	Year 3
Sales	$2,000,000	$1,425,000	$2,287,500
Variable Expenses
Variable Cost of Goods Sold	1,120,000	798,000	1,281,000
Variable Selling and Administrative Expenses	40,000	28,500	45,750
Total Variable Expenses	1,160,000	826,500	1,326,750
Contribution Margin	840,000	598,500	960,750
Fixed Expenses
Manufacturing	400,000	400,000	400,000
Selling and Administrative	40,500	40,500	40,500
Total Fixed Expenses	440,500	440,500	440,500
Net Operating Income	$ 399,500	$158,000	$ 520,250

2.

Change in Inventory	x	Predetermined Fixed Overhead Rate	=	Difference in Fixed Overhead Expensed under Absorption and Variable Costing
0	x	$ 5	=	$ 0
23,000	x	5	=	$ 115,000
(11,500)	x	5	=	$ (57,500)

3.a.

Difference in reported income

$ 57,500

b. Total operating income will be same under absorption and variable costing.