Peter Ltd manufactures and sells batteries. The cost data for the product are given below. The accountant told the President that he will prepare two different sets of income statements for the President’s review. The data are given as follows: Variable cost: Direct materials $6 Direct labor $12 Variable overhead $4 Variable selling and administrative $3 Fixed cost per month: Fixed manufacturing overhead $240,000 Fixed selling and administrative $180,000 The batteries sell for $40 per unit. Production and sales data for January are shown below. Units produced 30,000 Units sold 26,000 Required: a. Prepare the absorption costing income statement. b. Prepare the variable costing income statement. c. Explain to the President the differences between the two income statements (if any) and the net income figures he should rely on.
Cost-Volume-Profit Analysis
Cost Volume Profit (CVP) analysis is a cost accounting method that analyses the effect of fluctuating cost and volume on the operating profit. Also known as break-even analysis, CVP determines the break-even point for varying volumes of sales and cost structures. This information helps the managers make economic decisions on a short-term basis. CVP analysis is based on many assumptions. Sales price, variable costs, and fixed costs per unit are assumed to be constant. The analysis also assumes that all units produced are sold and costs get impacted due to changes in activities. All costs incurred by the company like administrative, manufacturing, and selling costs are identified as either fixed or variable.
Marginal Costing
Marginal cost is defined as the change in the total cost which takes place when one additional unit of a product is manufactured. The marginal cost is influenced only by the variations which generally occur in the variable costs because the fixed costs remain the same irrespective of the output produced. The concept of marginal cost is used for product pricing when the customers want the lowest possible price for a certain number of orders. There is no accounting entry for marginal cost and it is only used by the management for taking effective decisions.
Peter Ltd manufactures and sells batteries. The cost data for the product are given below. The accountant told the President that he will prepare two different sets of income statements for the
President’s review. The data are given as follows:
Variable cost:
Direct materials $6
Direct labor $12
Variable
Variable selling and administrative $3
Fixed cost per month:
Fixed manufacturing overhead $240,000
Fixed selling and administrative $180,000
The batteries sell for $40 per unit. Production and sales data for January are shown below.
Units produced 30,000
Units sold 26,000
Required:
a. Prepare the absorption costing income statement.
b. Prepare the variable costing income statement.
c. Explain to the President the differences between the two income statements (if any) and the net income figures he should rely on.
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