Chapter 10, Problem 4P

To determine

Prepare comparative income statement and comparative schedule of cost of goods sold for each month under (1) absorption costing method and (2) variable costing method.

Explanation of Solution

Absorption costing: It refers to the method of product costing in which the price of the product is calculated considering all fixed as well as the variable or direct costs. The valuation of closing inventory in this method is consisting both fixed and variable costs.

Variable costing: It refers to the method of product costing in which the price of the product is calculated considering only the variable or direct costs or the cost that happened to occurred due to the product only. It also called as marginal costing as it takes marginal costs while calculating the product cost.

Prepare comparative income statement and comparative schedule of cost of goods sold for each month under (1) absorption costing method and (2) variable costing method as follows:

Comparative schedule of cost of goods sold for each month:

Table (1)

Comparative income statement for each month:

Table (2)

Working note (1):

Calculate the absorption costing per unit.

$\begin{array}{c}\begin{array}{l}\text{Absorption }\\ \text{costing per unit }\end{array}\}\text{=}\left[\begin{array}{l}\left(\frac{\text{Fixed overhead per year}}{\text{Annual production units}}\right)+\\ \text{Variable cost per unit}\end{array}\right]\\ =\left(\frac{\$240,000}{48,000\text{ units}}+\$16\text{ per unit}\right)\\ =\$5+\$16\\ =\$21\text{ per unit}\end{array}$

Working note (2):

Calculate the ending inventory units for each month.

Particulars	January	February	March
Beginning inventory	0	1,000	0
Add: Number of units produced	4,000	3,000	5,000
Less: Number of units sold	3,000	4,000	4,000
Ending inventory	1,000	0	1,000

Table (3)

Working note (3):

Calculate the cost of goods sold and ending inventory under absorption costing for each month.

Particulars	January	February	March
Number of units produced (A)	4,000	3,000	5,000
Absorption cost per unit (B) (1)	$ 21	$ 21	$ 21
Cost of goods manufactured $\left(A\times B\right)$	$ 84,000	$ 63,000	$ 105,000
Ending inventories units (C) (2)	1,000	0	1,000
Absorption cost per unit (D)	$ 21	$ 21	$ 21
Ending inventory $\left(C\times D\right)$	$ 21,000	$ 0	$ 21,000
Beginning inventory units (E) (2)	0	1,000	0
Absorption cost per unit (F)	$ 21	$ 21	$ 21
Beginning inventory $\left(E\times F\right)$	$ 0	$ 21,000	$ 0

Table (4)

Working note (4):

Calculate the cost of goods sold and ending inventory under variable costing for each month.

Particulars	January	February	March
Number of units produced (A)	4,000	3,000	5,000
Variable cost per unit (B)	$ 16	$ 16	$ 16
Cost of goods manufactured	$ 64,000	$ 48,000	$ 80,000
Ending inventories units (C) (2)	1,000	0	1,000
Variable cost per unit (D)	$ 16	$ 16	$ 16
Ending inventory	$ 16,000	$ 0	$ 16,000
Beginning inventory units (E) (2)	0	1,000	0
Variable cost per unit (F)	$ 16	$ 16	$ 16
Beginning inventory $\left(E\times F\right)$	$ 0	$ 16,000	$ 0

Table (5)

Working note (5):

Calculate the under or over applied fixed overhead.

January:

$\begin{array}{c}\begin{array}{l}\text{Under (over) }\\ \text{applied overhead}\end{array}\}\text{ =}\left[\begin{array}{l}\left(\frac{\text{Fixed factory overhead}}{\text{Months in a year}}\right)-\\ \left(\begin{array}{l}\frac{\text{Fixed factory overhead}}{\text{Number of production units}}\times \\ \text{Units produced}\end{array}\right)\end{array}\right]\\ =\left[\begin{array}{l}\left(\frac{\$240,000}{12}\right)-\\ \left(\frac{\$240,000}{48,000\text{ units}}\times 4,000\text{ units}\right)\end{array}\right]\\ =\left[\$20,000-\left(\$5\times 4,000\right)\right]\\ =\$0\end{array}$

February:

$\begin{array}{c}\begin{array}{l}\text{Under (over) }\\ \text{applied overhead}\end{array}\}\text{ =}\left[\begin{array}{l}\left(\frac{\text{Fixed factory overhead}}{\text{Months in a year}}\right)-\\ \left(\begin{array}{l}\frac{\text{Fixed factory overhead}}{\text{Number of production units}}\times \\ \text{Units produced}\end{array}\right)\end{array}\right]\\ =\left[\begin{array}{l}\left(\frac{\$240,000}{12}\right)-\\ \left(\frac{\$240,000}{48,000\text{ units}}\times 3,000\text{ units}\right)\end{array}\right]\\ =\left[\$20,000-\left(\$5\times 3,000\right)\right]\\ =\$5,000\end{array}$

March:

$\begin{array}{c}\begin{array}{l}\text{Under (over) }\\ \text{applied overhead}\end{array}\}\text{ =}\left[\begin{array}{l}\left(\frac{\text{Fixed factory overhead}}{\text{Months in a year}}\right)-\\ \left(\begin{array}{l}\frac{\text{Fixed factory overhead}}{\text{Number of production units}}\times \\ \text{Units produced}\end{array}\right)\end{array}\right]\\ =\left[\begin{array}{l}\left(\frac{\$240,000}{12}\right)-\\ \left(\frac{\$240,000}{48,000\text{ units}}\times 5,000\text{ units}\right)\end{array}\right]\\ =\left[\$20,000-\left(\$5\times 5,000\right)\right]\\ =\$(5,000)\end{array}$

Working note (6):

Calculate the fixed selling and administrative expense per month.

$\begin{array}{c}\begin{array}{l}\text{Fixed selling and }\\ \text{administrative expense}\end{array}\}\text{ = }\frac{\left(\begin{array}{l}\text{Fixed selling and administrative }\\ \exp \text{ense per year}\end{array}\right)}{\text{Months in a year}}\\ =\frac{\$60,000}{12}\\ =\$5,000\end{array}$

Working note (7):

Calculate the fixed factory overhead per month.

$\begin{array}{c}\begin{array}{l}\text{Fixed factory }\\ \text{overhead}\end{array}\}\text{ = }\frac{\left(\text{Fixed factory overhead}\right)}{\text{Months in a year}}\\ =\frac{\$240,000}{12}\\ =\$20,000\end{array}$