Question

Champion Motors assembles and sells motor vehicles and uses standard costing. Actual data relating to April and May 2017 are attached in a photo.

tandard costing. Ad nduction used to call April May fficiency, or spending variance Unit data: Beginning inventory Production 50 400 or Champion Motor 375 Sales 350 395 Motors under varia nplete the bottom portion (Co 8,500 $ 8,500 ril 2017 2,400 2,400 Variable costs: Manufacturing cost per unit produced Operating (marketing) cost per unit sold Fixed costs: Manufacturing costs Operating (marketing) costs $ 2,200,000 $ 675,000 2,200,000 675,000 Print Done

The selling price per vehicle is $25,000. The budgeted level of production used to calculate the budgeted fixed manufacturing cost per unit is 400 units. There are no price, efficiency, or spending variances. Any production volume variance is written off to cost of goods sold in the month in which it occurs.

1. Prepare April and May 2017 income statements for Champion Motors under (a) variable costing and (b) absorption costing.
2. Prepare a numerical reconciliation and explanation of the difference between operating income for each month under variable costing and absorption costing.

Answer 1

Calculation of Closing Stock April May Unit Data A.Beginning Inventory 50.00 B.Production 400.00 375.00 C.Sales 350.00 395.00 Closing A +B-C 50.00 30.00

Variable Costing April May Calculation of unit Product Cost Absorption Costing Particulars Calculation April May Variable Costs: Manufacturing Cost per unit produced $ 8,500.00 $ 8,500.00 Fixed Costs Manufacturing Cost per unit produced Manf. Costs / Units produced = $2,200,000 / 400 / $ 5,500.00 Manf. Costs / Units produced = ($2,200,000/375 $ 5,866.67 Unit Product Cost $ 14,000.00 $ 14,366.67 $ 8,500.00 $ 8,500.00 $ 8,500.00 $ 8,500.00

Cost of goods Sold Calculation Absorption Costing Calculation |May Variable Costing May April April Particulars A.Opening Stock Previous Closing 0 $ - 50 x $14,000 $ 7,00,000.00 30 x $8,500 $ 4,25,000.00 B.Cost of goods manufactured $ 56,00,000.00 No. of production x Unit product cost 400 x $14,000 375 x $14.366.67 400 x $8,500 375 x $8.500 $ 53,87,500.00 $ 34,00,000.00 $ 31,87,500.00 C. Closing Inventory $ 7,00,000.00 No. of units x Unit product cost 50 x $14,000 30 x $14,366.67 50 x $8,500 30 x $8,500 $ 4,31,000.00 $ 4,25,000.00 $ 2,55,000.00 Cost of Goods Sold A+B-C $ 49,00,000.00 $ 56,56,500.00 $ 29,75,000.00 $ 33,57,500.00

May Particulars Sales Champion Motors Income Statement (Absorption Costing) Calculation April No. of units sold x Sales price 350 x $25,000 $ 87,50,000.00 395 x $25,000 $ 98,75,000.00 WN $ 49,00,000.00 $ 56,56,500.00 Less: Cost of Goods Sold Add: Over absorption Gross Profit $2,200,000 - $2,062,500 $ 1,37,500.00 $ 43,56,000.00 $ 38,50,000.00 Less: Variable operating Marketing cost) No. of units sold x Cost p.u 350 x $2400 $ 8,40,000.00 395 x $2400 Fixed operating Marketing cost) $ 6,75,000.00 Net Operating Income $23,35,000.00 $ 9,48,000.00 $ 6,75,000.00 $ 27,33,000.00

May Particulars Sales Champion Motors Income Statement (Variable Costing) Calculation April No. of units sold x Sales price 350 x $25,000 $87,50,000.00 395 x $25,000 $ 98,75,000.00 Less: Cost of Goods Sold WN $29,75,000.00 $ 33,57,500.00 Gross Contribution Margin $57,75,000.00 $ 65,17,500.00 Less: Variable operating Marketing cost) No. of units sold x Cost pu 350 x $2400 $ 8,40,000.00 395 x $2400 $ 9,48,000.00 Contribution Margin $ 49,35,000.00 $ 55,69,500.00 Less: Fixed Manufacturing cost Given $ 22,00,000.00 $ 22,00,000.00 Fixed operating Marketing cost) Given $ 6,75,000.00 $ 6,75,000.00 Net Operating Income $ 20,60,000.00 $ 26,94,500.00

April Reconciliation Schedule Particulars Calculation May Net Operating Income under Variable costing $ 20,60,000.00 $ 26,94,500.00 Add: Fixed Manufacturing overhead deferred in inventory Closing units x fixed manf. Ohp $ 2,75,000.00 $ 1,76,000.00 Less: Over Absorption $ 1,37,500.00 Net Operating Income under Absorption costing $ 23,35,000.00 $ 27,33,000.00