Reference no: EM131124229

Topic: Absorption and Variable Costing

3.   Hudson Corporation wants to change to the variable costing method of inventory valuation for making internal decisions.  The LIFO method is being used.  The absorption statements of income for Years 1 and 2 are as follows:

	Year 1	Year 2
Sales (5,000 units)	$300,000	$300,000
Cost of Goods Sold	180,000	190,000
Gross Profit	$120,000	$110,000

SG&A expenses*	40,000	40,000
Net Income	mce_markernbsp; 80,000	mce_markernbsp; 70,000

*Selling and administrative expenses include variable costs of $2 per unit sold.

 

Production data are as follows:

	Year 1	Year 2
Production units	8,000	6,000
Variable costs per unit	$30	$30
Fixed overhead costs	$48,000	$48,000

Required:

a.   Compute the absorption cost per unit manufactured in Years 1 and 2.

b.   Explain why the net income for Year 1 was higher than the net income for Year 2 when the same number of units was sold in each year.

c.   Prepare income statements for both years using variable costing.

d.   Reconcile the absorption costing and variable costing net income figures for each year.  Start with variable costing net income. 

Topic: Absorption Income Statement

4.   The variable costing income statement for Crawford Company for this quarter is as follows:

Crawford Company Variable Costing Income Statements For the current quarter
Sales (5,000 units)		$1,000,000
Cost of Goods Sold (variable)	$300,000
Variable selling (10% of sales)	100,000	400,000
Contribution Margin		mce_markernbsp;  600,000
Fixed manufacturing overhead	$240,000
Fixed administrative expenses	144,000	384,000
Net income		mce_markernbsp;  216,000

Selected data for the quarter concerning the operations of the company are as follows:

Beginning inventory	0 units
Units produced	8,000 units
Direct manufacturing labor	$30 per unit
Direct manufacturing materials	16 per unit
Variable manufacturing overhead	14 per unit

Required: Prepare an absorption costing income statement for the quarter.

Topic: Absorption and Variable Costing Income Statements

5.   Whittier Company produced 10,000 cases of cookies this year.  It sold 9,500 cases for $20 each. There were no beginning inventories.  Variable manufacturing costs were $60,000, and fixed manufacturing expenses were $100,000.  Selling and administrative expenses were $20,000, all fixed.

Required:

a.   Prepare income statements using the variable costing and absorption costing.

b.   Reconcile the net income under absorption and variable costing. 

Essay Questions

Topic: Absorption and Variable Costing Compared

1.   Compare and contrast absorption and variable costing.

Topic: Fixed Cost as Period or Product Cost

2.   Since fixed product costs are eventually recorded as expenses under both variable and absorption costing by the time the inventory is sold, why does it matter whether fixed overhead is treated as a product cost or a period cost?

Topic: Pros and Cons of Absorption and Variable Costing

3.   Provide an argument in favor of using variable costing and an argument against the use of variable costing.