Absorption and Variable Costing Comparisons Peachtree Company manufactures peach

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Absorption and Variable Costing Comparisons Peachtree Company manufactures peach jam. Because of bad weather, its peach crop was small. The following data have been gathered for the summer quarter of 2014: Beginning inventory (cases) 0 Cases produced 9,000 Cases sold 8,200 Sales price per case $ 60 Direct materials per case $ 8 Direct labor per case $ 9 Variable manufacturing overhead per case $ 3 Total fixed manufacturing overhead $ 320,000 Variable selling and administrative cost per case $ 2 Fixed selling and administrative cost $ 48,000 (a) Prepare a functional income statement for the quarter using absorption costing. (Round answers to the nearest dollar. Do not use negative signs with your answers, EXCEPT if you calculate a net loss.) Peachtree Company Functional (Absorption Costing) Income Statement For the Summer Quarter 2014 Sales $Answer Cost of goods sold: Variable costs $Answer Fixed costs Answer Goods available Answer Ending inventory Answer Answer Gross profit Answer Operating expenses: Variable selling and administrative $Answer Fixed selling and administrative Answer Answer Net income (loss) $Answer (b) Prepare a contribution income statement for the quarter using variable costing. (Do not use negative signs with your answers, EXCEPT if you calculate a net loss.) Peachtree Company Contribution (Variable Costing) Income Statement For the Summer Quarter 2014 Sales $Answer Variable expenses: Manufacturing $Answer Selling and administrative Answer Answer Contribution margin Answer Fixed expenses: Manufacturing overhead $Answer Selling and administrative Answer Answer Net income (loss) $Answer (c) What is the value of ending inventory under absorption costing? (Round answer to the nearest whole number.) $Answer (d) What is the value of ending inventory under variable costing? $Answer (e) The difference in the value of ending inventory in parts (c) and (d) is explained by the following difference between absorption and variable costing: Variable costing treats all manufacturing costs as variable costs while absorption costing treats only variable manufacturing costs as variable costs. Absorption costing treats fixed costs as period costs while variable costing treats fixed costs as product costs. Variable costing assigns only variable manufacturing costs to products while absorption costing assigns both variable and fixed manufacturing costs to products. Absorption costing treats all manufacturing costs as period costs while variable costing treats only variable manufacturing costs as period costs. Check Next

Explanation / Answer

Particulars No.of cases Inventory at the beginning 0 (+) Produced during summer quarter of 2014 9000 (-) Sold 8200 Inventory at the end 800 In $ Sale price per case 60 Direct material per case 8 Direct labour per case 9 Variable Mfg Overhead per case 3 Total Fixed Mfg Overheads 320000 Variable selling & admin cost per case 2 Fixed selling and admin cost 48000 Answer 1 Functional Income statement for the quarter using adsorption costing Particulars In $ Direct Material (9000 * 8) 72000 Direct labour (9000 * 9) 81000 Variable Mfg Overhead (9000*3) 27000 Fixed Mfg Overhead 320000 Cost of production 500000 Less : Closing Inventory {(500000/9000)*800} 44444 Cost of goods sold 455556 Add : Variable selling & admin cost (8200*2) 16400 Add : Fixed selling & admin cost 48000 Cost of sales 519956 Sales (8200 * 60) 492000 Loss (Sales - Cost of sales) -27956 Answer 2 Contribution (variable costing) Income statement for the quarter using variable costing Particulars In $ Sales (8200*60) 492000 Less : Variable cost Direct Material (8200 * 8) 65600 Direct labour (8200 * 9) 73800 Variable Mfg Overhead (8200*3) 24600 Variable selling & admin cost (8200*2) 16400 Total Variable cost 180400 Contribution ( Sales - variable cost) 311600 Less : Fixed costs Fixed Mfg Overhead 320000 Fixed selling & admin cost 48000 Loss (Contribution - Fixed cost) -56400 Answer 3 Cost of ending inventory under Absorption costing = (Cost of production / no.of units produced ) * units in Inventory Cost of ending inventory under Absorption costing = (500000 / 9000) *800 = $44444 Answer 4 Cost of ending inventory under variable costing = Variable Mfg Cost per unit * units in Inventory Variable Mfg cost per unit = Direct Material cost per unit + Direct labour cost per unit + variable mfg cost per unit Variable Mfg cost per unit = 8 + 9 +3 = $20 per unit Cost of ending inventory under Variable costing = 20 * 800 = $16000

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