344 Alternative Inventory Costing Methods: A Decision-Making Perspective CHAPTER

Question

344 Alternative Inventory Costing Methods: A Decision-Making Perspective CHAPTER 8 P8-38B Zaki Metal Company produces the steel wire that is used for the production of paper dips. In 2016, the first year (SO 1, 2, 3) Prepare income statements under absorption costing and variable costing for a company with begin ning inventory of operations, Zaki produced 60,000 km of wire and sold 50,000 km. In 2017, the production and sales results were exactly reversed in each year, the selling price per kilometre was $ 120); variable manufacturing costs were 25% of the sales price of the units produced; variable selling expenses were $9 per kilo fixed administrative expenses were $300,000. Instructions (a) Prepare income statements for each year using variable costing. (Use the format from Illustration 8-5.) (b) Prepare income statements for each year using absorption costing. (Use the format from Illustration 8-4.) (c) Reconcile the differences for each year in income from operations under the two costing approaches. (d Comment on the effects that the production and sales levels have on net income under the two costing approaches. metre sold; fixed manufacturing costs were $1.5 million; and 2016 NI: (a) $2,250,000

Explanation / Answer

Solution a:

Solution b:

Solution c:

Solution d:

If Production units differs from sales units then income under both approach will differ. In variable costing all fixed expenses charged to income statement irrespective of number of units produced and sold. however in absorption costing, fixed manufacturing overhead charged to production and if all units are not sold then value of ending inventory contains fixed manufacturing overhead, hence income under absorption costing will increase due to deferment of fixed manufacturing overhead. Under variable costing, ending inventory is valued at variable manufacturing cost only.

Variable costing contribution format income statement Particulars Per unit Year 1 Year 2 Details Amount Details Amount Sales $120.00 50000*$120 $6,000,000.00 60000*$120 $7,200,000.00 Variable Cost: Variable manufacturing cost $30.00 50000*$30 $1,500,000.00 60000*$30 $1,800,000.00 Variable Selling and Administrative Expenses $9.00 50000*$9 $450,000.00 60000*$9 $540,000.00 Contribution $81.00 $4,050,000.00 $4,860,000.00 Fixed Manufacturing Overhead $1,500,000.00 $1,500,000.00 Fixed Selling & Administrative Expenses $300,000.00 $300,000.00 Net Income $2,250,000.00 $3,060,000.00

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