Score: 0 of 1 pt 45of 6 (3 complete) Hw Score: 47.62%, 2.86 of 6 pt E6-56B (simi

Question

Score: 0 of 1 pt 45of 6 (3 complete) Hw Score: 47.62%, 2.86 of 6 pt E6-56B (similar to) Spade Industries has one product. Information about the production and sales of that product for the past year follow EEL (Click the icon to view the data.) The company had no beginning inventory Read the Requirement 1. Prepare two income statements for the year, one using absorption costing and one using variable costing Begin by preparing the income statement for the year using abeorption costing. Spade Industries Income Statement (Absorption Costing)

Explanation / Answer

1. Aborption Costing Income Statement:

Variable Costing Income Statement:

a. Product cost per unit under absorption costing :$ 30

b. Product cost per unit under variable costing : $ 21.

c. Ending inventory balance under absorption costing = 10,000 units x $ 30 per unit = $ 300,000.

d. Ending inventory balance under variable costing = 10,000 units x $ 21 per unit = $ 210,000.

e. Cost of goods sold using absorption costing = 12,000 units x $ 30 = $ 360,000.

f. Cost of goods sold using variable costing = 12,000 units x $ 21 = $ 252,000.

g. Operating income using absorption costing : $ 132,000

h. Operating income using variable costing : $ 42,000

2. The reason for the diference in operating income under the two methods is fixed manufacturing overhead. Fixed manufacturing overhead of $ 9 ( $ 198,000 / 22,000 units) is part of product cost in absorption costing.

Since ending inventory is 10,000 units of finished goods, a part of the total fixed manufacturing overhead is deferred to the next accounting period through unsold inventory. Therefore, $ 90,000 ( 10,000 units x $ 9 per unit) is reduced from current period COGS and deferred to the next period. This increases the operating income by $ 90,000.

Therefore, the operating income under absorption costing is $ 132,000 and that under variable costing is only $ 42,000. Under variable costing, all fixed expenses are treated as period expenses, and cannot be deferred.

$ $ Sales Revenue 564,000 Less: Cost of Goods Sold Beginning Inventory : Finished Goods 0 Cost of Goods Manufactured 660,000 Less: Ending Inventory : Finished Goods (300,000) 360,000 Gross Profit 204,000 Less: Variable Operating Expenses 24,000 Fixed Operating Expenses 48,000 72,000 Net Operating Income 132,000

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