True or false
- Both fixed and variable factory costs are included as a part of cost of goods sold when accounting for absorption costing.
- Both fixed and variable factory costs are included as a part of cost of goods sold when accounting for variable costing.
- When units manufactured are less than the number of units sold, the variable costing income from operations will be ________ that of absorption costing.
- less than
- greater than
- equal to
- None of these choices are correct.
Question 2.
Income Statements under Absorption and Variable Costing
Shawnee Motors Inc. assembles and sells MP3 players. The company began operations on August 1 and operated at 100% of capacity during the first month. The following data summarize the results for August:
| Sales (20,000 units) | $3,000,000 | |||
| Production costs (26,000 units): | ||||
| Direct materials | $1,443,000 | |||
| Direct labor | 691,600 | |||
| Variable factory overhead | 345,800 | |||
| Fixed factory overhead | 231,400 | 2,711,800 | ||
| Selling and administrative expenses: | ||||
| Variable selling and administrative expenses | $420,300 | |||
| Fixed selling and administrative expenses | 162,700 | 583,000 | ||
If required, round interim per-unit calculations to the nearest cent.
- Prepare an income statement according to the absorption costing concept.
| Shawnee Motors Inc. | |
| Absorption Costing Income Statement | |
| For the Month Ended August 31 | |
| $ | |
| $ | |
| $ | |
- Prepare an income statement according to the variable costing concept.
| Shawnee Motors Inc. | ||
| Variable Costing Income Statement | ||
| For the Month Ended August 31 | ||
| $ | ||
| $ | ||
| $ | ||
| Fixed costs: | ||
| $ | ||
| $ | ||
- What is the reason for the difference in the amount of income from operations reported in (a) and (b)?
Under the method, the fixed manufacturing cost included in the cost of goods sold is matched with the revenues. Under , all of the fixed manufacturing cost is deducted in the period in which it is incurred, regardless of the amount of inventory change. Thus, when inventory increases, the income statement will have a higher income from operations than will the variable costing income statement.
Question 3
PowerTrain Sports Inc. manufactures and sells two styles of All Terrain Vehicles (ATVs), the Mountain Monster and Desert Dragon, from a single manufacturing facility. The manufacturing facility operates at 100% of capacity. The following per-unit information is available for the two products:
| 1 | Mountain Monster | Desert Dragon | |
| 2 | Sales price | $5,500.00 | $5,300.00 |
| 3 | Variable cost of goods sold | 3,290.00 | 3,300.00 |
| 4 | Manufacturing margin | $2,210.00 | $2,000.00 |
| 5 | Variable selling expenses | 1,000.00 | 1,152.00 |
| 6 | Contribution margin | $1,210.00 | $848.00 |
| 7 | Fixed expenses | 475.00 | 320.00 |
| 8 | Income from operations | $735.00 | $528.00 |
In addition, the following sales unit volume information for the period is as follows:
| Mountain Monster | Desert Dragon | |
| Sales unit volume | 5,000 | 4,850 |
Required:
| a. | Prepare a contribution margin by product report. Calculate the contribution margin ratio for each. Refer to the Amount Descriptions list provided for the exact wording of the answer choices for text entries. | |
| b. | What advice would you give to the management of PowerTrain Sports Inc. regarding the relative profitability of the two products? | |
|
Amount Descriptions | ||
| · Contribution margin | ||
| · Contribution margin ratio | ||
| · Cost of goods sold | ||
| · Fixed expenses | ||
| · Gross profit | ||
| · Manufacturing margin | ||
| · Revenues | ||
| · Variable cost of goods sold | ||
| · Variable selling expenses | ||
- Prepare a contribution marginby product report. Calculate the contribution margin ratio for each. Refer to the Amount Descriptions list provided for the exact wording of the answer choices for text entries.
| PowerTrain Sports Inc. |
| Contribution Margin by Product |
| 1 | Mountain Monster | Desert Dragon | |
| 2 | |||
| 3 | |||
| 4 | |||
| 5 | |||
| 6 | |||
| 7 |
. What advice would you give to the management of PowerTrain Sports Inc. regarding the relative profitability of the two products?
The Mountain Monster line provides the(same, smaller larger)total contribution margin and the (same, smaller, larger) contribution margin ratio. If the sales mix were shifted more toward the(desert dragon, or, mountain monster) line, the overall profitability of the company would increase.