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Variable Costing Case Part A Solution

The document compares absorption costing and variable costing methods for two years. Absorption costing allocates both variable and fixed manufacturing costs to inventory and cost of goods sold, while variable costing only allocates variable costs. In year 1, absorption costing results in lower net income than variable costing due to higher cost of goods sold. In year 2, variable costing again results in higher net income than absorption costing.

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91 views3 pages

Variable Costing Case Part A Solution

The document compares absorption costing and variable costing methods for two years. Absorption costing allocates both variable and fixed manufacturing costs to inventory and cost of goods sold, while variable costing only allocates variable costs. In year 1, absorption costing results in lower net income than variable costing due to higher cost of goods sold. In year 2, variable costing again results in higher net income than absorption costing.

Uploaded by

G, B
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as XLSX, PDF, TXT or read online on Scribd
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Absorption Costing Variable Costing

Year 1 Year 2 Year 1

Physical Inventory
units units units
Opening finished goods inventory - 5,000 -
Production 25,000 25,000 25,000
Sales 20,000 30,000 20,000
Closing finished goods inventory 5,000 (5,000) 5,000

Cost of goods sold Total Total Total


$ $ $
Opening finished goods inventory - 90,000 -
Add: Cost of Good manufactured
Variable mfg costs 250,000 250,000 250,000
Fixed mfg costs 200,000 200,000 150,000
Total mfg costs 450,000 540,000 400,000
Total cost of goods available for sale 450,000 540,000 400,000
Less: Closing finished goods inventory 90,000 80,000
Cost of goods sold 360,000 540,000 320,000

Traditional Income Statement Total Total Total


$ $ $
Sales 600,000 900,000 600,000
Less: COGS 360,000 540,000 320,000
Gross Margin 240,000 360,000 280,000
Less: SG&A Expenses
Variable 60,000 90,000 60,000
Fixed 100,000 100,000 100,000
Total SG&A 160,000 190,000 160,000

Net Income 80,000 170,000 120,000


Variable Costing

Year 2

units
5,000
25,000
30,000
(5,000)

Total
$
80,000

250,000
150,000
400,000
480,000

480,000

Total
$
900,000
480,000
420,000

90,000
100,000
190,000

230,000
Absorption Costing
Year 1 Year 2
Physical Inventory
units units
Opening finished goods inventory - 400
Production 2,400 250
Sales 2,000 600
Closing finished goods inventory 400 50

Cost of goods sold Total Total


$ $
Opening finished goods inventory - 37,333
Add: Cost of Good manufactured
Variable mfg costs 24,000 2,500
Fixed mfg costs 200,000 200,000
Total mfg costs 224,000 239,833
Total cost of goods available for sale 224,000 239,833
Less: Closing finished goods inventory 37,333
Cost of goods sold 186,667 239,833

Traditional Income Statement Total Total


$ $
Sales 60,000 18,000
Less: COGS 186,667 239,833
Gross Margin (126,667) (221,833)
Less: SG&A Expenses
Variable 6,000 1,800
Fixed 100,000 100,000
Total SG&A 106,000 101,800

Net Income (232,667) (323,633)

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