Concept explainers
(a)
Absorption Costing
Absorption costing is compulsory under Generally Accepted Accounting Principles (GAAP) for financial statements circulated to the external users. Under absorption costing, the cost of goods manufactured includes direct materials, direct labor, and factory
Variable Costing
Managers frequently use variable costing for internal purposes for taking decision making. The cost of goods manufactured includes direct materials, direct labor, and variable factory overhead. Fixed factory overhead treated as period (fixed) expense.
To Determine: The income statement according to the absorption costing concept for the Company FPF.
(a)

Answer to Problem 20.1APR
Calculate the income statement according to the absorption costing concept for the Company FPF as shown below:
Company FPF | ||
Absorption costing income statement for the month ended | ||
May 31, 2016 | ||
Particulars | $ | $ |
Sales | 6,480,000 | |
Less: Cost of goods sold | ||
Cost of goods manufactured | 5,760,000 | |
Ending inventory (2) | (576,000) | |
Total cost of goods sold | 5,184,000 | |
Gross profit | 1,296,000 | |
Less: Selling and administrative expenses | 936,000 | |
Income from operations | 360,000 |
Table (1)
Explanation of Solution
Working notes:
- 1. Calculate the value of ending inventory per unit.
2. Calculate the value of ending inventory
Therefore, income from operations under absorption costing concept of Company FPF is $360,000.
(b)
The income statement according to the variable cost concept for the Company FPF.
(b)

Answer to Problem 20.1APR
Calculate the income statement according to the variable costing concept for the Company FPF as shown below:
Company FPF | ||
Variable costing income statement for the month ended | ||
May 31, 2016 | ||
Particulars | $ | $ |
Sales | 6,480,000 | |
Less: Variable cost of goods sold | ||
Variable cost of goods manufactured (3) | 5,200,000 | |
Ending inventory (5) | (520,000) | |
Total variable cost of goods sold | 4,680,000 | |
Manufacturing margin | 1,800,000 | |
Less: Variable selling and administrative expenses | 648,000 | |
Contribution margin | 1,152,000 | |
Less: Fixed costs | ||
Fixed manufacturing costs | 560,000 | |
Fixed selling and administrative expenses | 288,000 | |
Total fixed cost | 848,000 | |
Income from operations | 304,000 |
Table (2)
Explanation of Solution
Working notes:
1. Calculate cost of goods manufactured
2. Calculate the value of ending inventory per unit.
3. Calculate the value of ending inventory
Therefore, income from operations under variable costing concept of Company FPF is $304,000.
(c)
To Identify: The reason for the difference between in the amount of income from operations reported in absorption costing income statement and variable costing income statement.
(c)

Explanation of Solution
The difference between the absorption and variable costing income from operations of $56,000
Increase in inventory = 4,000 units
Fixed factory overhead per unit = $14
Under absorption costing method, the fixed
Under variable costing, all of the fixed factory overhead cost is subtracted in the period in which it is incurred, regardless of the amount of inventory change. Therefore, when inventory rises, the absorption costing income statement will have a higher income from operations than will the variable costing income statement.
Want to see more full solutions like this?
Chapter 20 Solutions
EBK FINANCIAL & MANAGERIAL ACCOUNTING
- Can you solve this general accounting problem with appropriate steps and explanations?arrow_forwardI am trying to find the accurate solution to this general accounting problem with the correct explanation.arrow_forward← Week 1: Homework Question 3 of 4 8.75/10 The project is completed in 2025, and a successful patent is obtained. The R&D costs to complete the project are $113,000. The administrative and legal expenses incurred in obtaining patent number 472-1001-84 in 2025 total $16,000. The patent has an expected useful life of 5 years. Record the costs for 2025 in journal entry form. Also, record patent amortization (full year) in 2025. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter O for the amounts. List all debit entries before credit entries.) Account Titles and Explanation Research and Development Expense Cash (To record research and development costs) Patents Cash (To record legal and administrative costs) Amortization Expense Patents (To record one year's amortization expense) Debit 113000 16000 3200 Credit 113000 16000 3200arrow_forward
- Joe transfers land to JH Corporation for 90% of the stock in JH Corporation worth $20,000 plus a note payable to Joe in the amount of $40,000 and the assumption by JH Corporation of a mortgage on the land in the amount of $100,000. The land, which has a basis to Joe of $70,000, is worth $160,000. a. Joe will have a recognized gain on the transfer of $90,000. b. Joe will have a recognized gain on the transfer of $30,000.c. JH Corporation will have a basis in the land transferred by Joe of $70,000. d. JH Corporation will have a basis in the land transferred by Joe of $160,000. e. None of the above.arrow_forwardPlease provide the correct answer to this general accounting problem using accurate calculations.arrow_forwardCan you solve this general accounting question with accurate accounting calculations?arrow_forward
- Managerial Accounting: The Cornerstone of Busines...AccountingISBN:9781337115773Author:Maryanne M. Mowen, Don R. Hansen, Dan L. HeitgerPublisher:Cengage LearningManagerial AccountingAccountingISBN:9781337912020Author:Carl Warren, Ph.d. Cma William B. TaylerPublisher:South-Western College PubCornerstones of Cost Management (Cornerstones Ser...AccountingISBN:9781305970663Author:Don R. Hansen, Maryanne M. MowenPublisher:Cengage Learning
- Principles of Accounting Volume 2AccountingISBN:9781947172609Author:OpenStaxPublisher:OpenStax CollegeFinancial And Managerial AccountingAccountingISBN:9781337902663Author:WARREN, Carl S.Publisher:Cengage Learning,Principles of Cost AccountingAccountingISBN:9781305087408Author:Edward J. Vanderbeck, Maria R. MitchellPublisher:Cengage Learning




