Managerial Accounting
Managerial Accounting
15th Edition
ISBN: 9781337912020
Author: Carl Warren, Ph.d. Cma William B. Tayler
Publisher: South-Western College Pub
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Chapter 7, Problem 1PA

(a)

To determine

Calculate the income statement according to the absorption costing concept for the Company KF.

(a)

Expert Solution
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Explanation of Solution

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 overhead costs. Fixed factory overhead and variable factory overhead included as a part of factory overhead.

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.

Calculate the income statement according to the absorption costing concept for the Company KF as shown below:

Company KF
 Absorption costing income statement for the month ended
 August, 31
 Particulars  $  $
 Sales    10,800,000
  Less: Cost of goods sold   
 Cost of goods manufactured    9,600,000  
 Ending inventory (2)    (960,000) 
 Total cost of goods sold      8,640,000
 Gross profit      2,160,000
  Less: Selling and administrative expenses     1,260,000
 Income from operations         900,000

Table (1)

Working note (1):

Calculate the value of ending inventory per unit.

Ending inventory =Cost of good soldUnits manufactured=$9,600,00080,000 Units=$120

Working note (2):

Calculate the value of ending inventory

Ending inventory = [Units manufactured ×Ending inventory rate per unit (1)]=80,000 Units×$120=$960,000

Conclusion

Therefore, income from operations under absorption costing concept of Company KF is $900,000.

(b)

To determine

Calculate the income statement according to the variable cost concept for the Company KF.

(b)

Expert Solution
Check Mark

Explanation of Solution

Calculate the income statement according to the variable costing concept for the Company KF as shown below:

Company KF
 Variable costing income statement for the month ended
 August, 31
 Particulars  $  $
 Sales    10,800,000
  Less: Variable cost of goods sold   
 Variable cost of goods manufactured (3)   9,280,000  
 Ending inventory (5)   (928,000) 
 Total variable cost of goods sold      8,352,000
 Manufacturing margin      2,448,000
 Less: Variable selling and administrative expenses      1,080,000
 Contribution margin      1,368,000
 Less: Fixed costs   
 Fixed manufacturing costs      320,000  
 Fixed selling and administrative expenses      180,000  
 Total fixed cost         500,000
 Income from operations         868,000

Table (2)

Working note (3):

Calculate cost of goods manufactured

Cost of goods manufactured = [Total manufacturing costFixed manufacturing cost]=$9,600,000$320,000=$9,280,000

Working note (4):

Calculate the value of ending inventory per unit.

Ending inventory =Cost of good soldUnits manufactured=$9,280,00080,000 Units=$116

Working note (5):

Calculate the value of ending inventory

Ending inventory = [Units manufactured ×Ending inventory rate per unit (4)]=80,000 Units×$116=$928,000

Conclusion

Therefore, income from operations under variable costing concept of Company KF is $868,000.

(c)

To determine

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)

Expert Solution
Check Mark

Explanation of Solution

The difference between the absorption and variable costing income from operations of $32,000 ($900,000  $868,000) can be explained as follows:

Increase in inventory = 8,000 units (80,000 Units72,000 Units)

Fixed factory overhead per unit = $4($320,00080,000 Units)

Difference in income from operations)=(Increase in inventory×Fixed factory overhead per unit)=8,000units ×$4per unit=$32,000

Under absorption costing method, the fixed factory overhead cost included in the cost of goods sold is coordinated with the incomes. As an effect, 8,000 units that were produced, but unsold it includes fixed factory overhead cost, which is not involved in the cost of goods sold.

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.

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Chapter 7 Solutions

Managerial Accounting

Ch. 7 - Variable costing Marley Company has the following...Ch. 7 - Prob. 2BECh. 7 - Variable costingsales exceed production The...Ch. 7 - Prob. 4BECh. 7 - Contribution margin by segment The following...Ch. 7 - At the end of the first year of operations, 21,500...Ch. 7 - Gallatin County Motors Inc. assembles and sells...Ch. 7 - Fresno Industries Inc. manufactures and sells...Ch. 7 - On March 31, the end of the first month of...Ch. 7 - On April 30, the end of the first month of...Ch. 7 - On October 31, the end of the first month of...Ch. 7 - The following data were adapted from a recent...Ch. 7 - Estimated income statements, using absorption and...Ch. 7 - The following data were adapted from a recent...Ch. 7 - Prob. 10ECh. 7 - Explain why service companies use different...Ch. 7 - Galaxy Sports Inc. manufactures and sells two...Ch. 7 - Prob. 13ECh. 7 - Sales territory and salesperson profitability...Ch. 7 - Prob. 15ECh. 7 - Prob. 16ECh. 7 - Variable costing income statement for a service...Ch. 7 - Variable costing income statement for a service...Ch. 7 - Prob. 1PACh. 7 - The demand for solvent, one of numerous products...Ch. 7 - During the first month of operations ended May 31,...Ch. 7 - Salespersons report and analysis Walthman...Ch. 7 - Segment variable costing income statement and...Ch. 7 - Absorption and variable costing income statements...Ch. 7 - Income statements under absorption costing and...Ch. 7 - Absorption and variable costing income statements...Ch. 7 - Prob. 4PBCh. 7 - Variable costing income statement and effect on...Ch. 7 - Prob. 1MADCh. 7 - Prob. 2MADCh. 7 - Prob. 3MADCh. 7 - Segment disclosure by Apple Inc. (AAPL) provides...Ch. 7 - Prob. 1TIFCh. 7 - Inventory effects under absorption costing BendOR,...Ch. 7 - Communication Bon Jager Inc. manufactures and...Ch. 7 - Prob. 1CMACh. 7 - Chassen Company, a cracker and cookie...Ch. 7 - Prob. 3CMACh. 7 - Bethany Company has just completed the first month...
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