
Concept explainers
1.
To prepare: Income statement of the company for the year using variable costing.
1.

Explanation of Solution
S. Company Income Statement (Variable Costing) For the year ended December 31, 2017 | ||||
Particulars | Amount ($) | Amount($) | ||
Sales | 24,500,000 | |||
Total Direct Material | (2,800,000) | |||
Total Direct Labor | (4,200,000) | |||
Variable Production | (2,100,000) | |||
Variable Selling & Administrative Overheads | (770,000) | (9,870,000) | ||
Contribution Margin | 14,630,000 | |||
Fixed Production Overheads | (7,000,000) | |||
Fixed Selling & Administrative Overheads | (4,250,000) | (11,250,000) | ||
Net Income | 3,380,000 | |||
Table (1) |
The net income at the year ending Dec 31, 2017 under variable costing is $3,380,000.
Working Note:
The calculation of variable production overhead is,
Where, number of units can be calculated as,
The calculation of variable cost per unit is,
Substitute 70,000 for number of units and $30 for variable overhead per unit in the above formula.
Thus, the net income at the year ending Dec 31, 2017 under variable costing is $3,380,000.
2.
To prepare: Income statement for the year using absorption costing.
2.

Explanation of Solution
S. Company Income Statement (Absorption Costing) For the year ended December 31, 2017 | ||||
Particulars | Amount($) | Amount($) | ||
Sales | 24,500,000 | |||
Cost of Goods Sold (Working Note) | (14,000,000) | |||
Gross Margin | 10,500,000 | |||
Variable Selling & Administrative Overheads | (770,000) | |||
Fixed Selling & Administrative Overheads | (4,250,000) | (5,020,000) | ||
Net Income | 5,480,000 | |||
Table (2) |
The net income at the year ending Dec 31, 2017 under absorption costing is $5,480,000.
Working note:
Calculation of cost of goods sold is,
Where, the cost per unit can be calculated as,
Particulars | Amount ($) Per Unit | |||
Direct Material | 40 | |||
Direct Labor | 60 | |||
Variable Overheads | 30 | |||
Fixed Overheads | 70 | |||
Total Cost Per Unit | 200 | |||
Table (3) |
Substitute 70,000 for number of units sold and $200 for cost per unit in the above formula.
Thus, the net income at the year ending Dec 31, 2017 under absorption costing is $5,480,000.
3.
To explain: The circumstances under which the reported income becomes identical under both absorption and variable costing.
- When the closing stock of the firm becomes zero, the reported incomes under both absorption and variable costing become identical.
- The only difference between the variable costing and absorption costing is the valuation of closing or ending inventory, so, whenever the value of ending inventory becomes equal or same, the incomes under both costing methods becomes identical.
Thus, the reported income becomes identical under both absorption and variable method when the values of closing inventory under both the methods become equal.
3.
To explain: The circumstances under which the reported income becomes identical under both absorption and variable costing.
3.

Explanation of Solution
- When the closing stock of the firm becomes zero, the reported incomes under both absorption and variable costing become identical.
- The only difference between the variable costing and absorption costing is the valuation of closing or ending inventory, so, whenever the value of ending inventory becomes equal or same, the incomes under both costing methods becomes identical.
Thus, the reported income becomes identical under both absorption and variable method when the values of closing inventory under both the methods become equal.
Want to see more full solutions like this?
Chapter 19 Solutions
FINANCIAL & MANAGERIAL ACCOUNTING
- General accountingarrow_forwardFinancial accounting questionarrow_forwardOn November 30, Sullivan Enterprises had Accounts Receivable of $145,600. During the month of December, the company received total payments of $175,000 from credit customers. The Accounts Receivable on December 31 was $98,200. What was the number of credit sales during December?arrow_forward
- Paterson Manufacturing uses both standards and budgets. For the year, estimated production of Product Z is 620,000 units. The total estimated cost for materials and labor are $1,512,000 and $1,984,000, respectively. Compute the estimates for: (a) a standard cost per unit (b) a budgeted cost for total production (Round standard costs to 2 decimal places, e.g., $1.25.)arrow_forwardQuestion: Gujri Place Clock Shop sold a grandfather clock for $2,250 subject to a 9% sales tax. The entry in the general journal will include a credit to Sales for a) $2,250.00 b) $2,092.50 c) $2,452.50. choose the correct optionarrow_forwardPlease help mearrow_forward
- AccountingAccountingISBN:9781337272094Author:WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.Publisher:Cengage Learning,Accounting Information SystemsAccountingISBN:9781337619202Author:Hall, James A.Publisher:Cengage Learning,
- Horngren's Cost Accounting: A Managerial Emphasis...AccountingISBN:9780134475585Author:Srikant M. Datar, Madhav V. RajanPublisher:PEARSONIntermediate AccountingAccountingISBN:9781259722660Author:J. David Spiceland, Mark W. Nelson, Wayne M ThomasPublisher:McGraw-Hill EducationFinancial and Managerial AccountingAccountingISBN:9781259726705Author:John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting PrinciplesPublisher:McGraw-Hill Education





