COST MANAGEMENT (W/CONNECT ACCESS)(LOOS
COST MANAGEMENT (W/CONNECT ACCESS)(LOOS
8th Edition
ISBN: 9781260722611
Author: BLOCHER
Publisher: MCG
Question
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Chapter 18, Problem 45E

1.

To determine

Draft an income statement using full costing

1.

Expert Solution
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Explanation of Solution

Statement of income statement under full cost method:

ParticularsPrior yearCurrent year
 Amount ($)Amount ($)Amount ($)Amount ($)
Sales (1) 1,320,000 1,430,000
Less: Cost of goods sold    
Beginning inventory- 24,000 
Cost of goods produced (2)600,000 600,000 
Available for sale600,000 624,000 
Less: Ending inventory24,000(3) - 
Cost of goods sold 576,000 624,000
Gross margin 744,000 806,000
Less: Selling and administrative cost    
Variable (4)12,000 13,000 
Fixed50012,50050013,500
Operating income 731,500 792,500

Table (1)

Therefore, the operating income for the prior year is $731,500 and for the current year is $792,500 respectively

Working notes:

1) Calculate the amount of sales:

For prior year

Sales=(Units×(Selling price per unit))=(24,000×$55)=$1,320,000

For current year:

Sales=(Units×(Selling price per unit))=(26,000×$55)=$1,430,000

2) Calculate the amount of cost of goods sold:

For prior year:

Cost of goods sold=[(Production×Variable cost)+Fixed cost]=[(25,000×$16)+$200,000]=$600,000

For current year:

Cost of goods sold=[(Production×Variable cost)+Fixed cost]=[(25,000×$16)+$200,000]=$600,000

3) Calculate the ending inventory:

For the prior period:

Ending inventory=(Units×cost per unit)=(1,000×$24)=$24,000

4) Calculate the variable cost:

For prior period:

Variable cost=(Units×(Variable cost per unit))=($24,000×$0.5)=$12,000

For current period:

Variable cost=(Units×(Variable cost per unit))=($26,000×$0.5)=$13,000

2.

To determine

Draft an income statement under variable costing.

2.

Expert Solution
Check Mark

Explanation of Solution

Statement of income statement under variable cost method:

ParticularsPrior yearCurrent year
 Amount ($)Amount ($)Amount ($)Amount ($)
Sales (1) 1,320,000 1,430,000
Less: Cost of goods sold    
Beginning inventory- 16,000 
Cost of goods produced (5)400,000 400,000 
Available for sale400,000 416,000 
Less: Ending inventory16,000(6) - 
Cost of goods sold384,000 416,000 
Plus: Variable selling (4)12,000396,00013,000429,000
Contribution Margin 924,000 1,001,000
Less: Fixed manufacturing cost200,000 200,000 
Fixed selling costs500200,500500200,500
Operating income 723,500 800,500

Table (2)

Therefore, the operating income for the prior year is $723,500 and for the current year is $800,500 respectively.

Working notes:

5) Calculate the cost of goods sold:

For prior period:

Cost of goods sold=(Production×Variable cost)=(25,000×$16)=$400,000

For current period:

Cost of goods sold=(Production×Variable cost)=(25,000×$16)=$400,000

6) Calculate the closing inventory:

For prior period:

Closing inventory=(Units×Cost per unit)=(1,000×$16)=$16,000

3.

To determine

Prepare reconciliation statement showing the difference in operating income.

3.

Expert Solution
Check Mark

Explanation of Solution

Statement of reconciliation showing the difference in operating income:

ParticularsPrior yearCurrent year
Change in inventory (a)1,000(1,000)
Fixed overhead rate (b)$8.00$8.00
Difference in operating income (a x b)$8,000($8,000)

Table (3)

Therefore, the change in operating income for the prior year is $8,000 increase and for the current year is $8,000 decrease.

An increase in inventory units shows the income of full costing higher than the variable costing, since there is excess of fixed cost in inventory than the previous year.

When the inventory unit decreases, the operating income of variable costing is higher than full costing. Here, as the inventory decreases the operating income for variable costing is higher than the full costing.

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