Question

Problem 2: it costs for producing a tree Felix and Oscar Industries makes artificial Christmas trees The unit costs for are: Direct materials $50 Direct Labor $30 Variable Overhead $30 Fixed Overhead The company incurs $2 per tree in variable selling and administrative costs and marketing costs. $10 administrative costs and $8,000 in fixed At the beginning of 2021 the company had 1,800 trees in the beginning finished Bus inventory. The company produced 4,000 more trees during the vear. Sales totaled 3,0 at a price of $200 per tree. more trees during the year. Sales totaled 3,000 trees Required: a. Based on absorption costing, what was the company's operating income for 2021? b. Based on variable costing, what was the company's operating income for 2021? C. Assume that in 2022 the company produced 4,000 trees and sold 5,000. Based on absorption costing, what was the operating income for 2022? Based on variable costing, what was the operating income for 2022? d. For both 2021 and 2022, explain why the operating income based on absorption costing differed from the operating income based on variable costing.

Answer 1

a.)	Operating Income statement (Absorption Costing) 2021
	Sales		600000	(3000*200)
	Less: Cost of Goods Sold		-360000
	(Manufacturing cost per unit * No. of Units Sold)
	(50+30+30+10) * 3000
	Less: Variable Selling & administrative Cost		-6000
	Less: Fixed MARkETING Cost		-8000
	Net Operating Income		226000
b)	Operating Income statement (Variable Costing) 2021
	Sales		600000	(3000*200)
	Less: Cost of Goods Sold		-330000
	(Manufacturing cost per unit * No. of Units Sold)
	(50+30+30) * 3000
	Less: Variable Selling & administrative Cost		-6000
	Less: Fixed Overhead Cost		-40000	(10*4000 Trees produced)
	Less: Fixed MARkETING Cost		-8000
	Net Operating Income		216000
c)-1	Operating Income statement (Absorption Costing) 2022
	Sales		1000000	(5000*200)
	Less: Cost of Goods Sold		-600000
	(Manufacturing cost per unit * No. of Units Sold)
	(50+30+30+10) * 5000
	Less: Variable Selling & administrative Cost		-10000
	Less: Fixed MARkETING Cost		-8000
	Net Operating Income		382000
c)-2	Operating Income statement (Variable Costing) 2022
	Sales		1000000	(5000*200)
	Less: Cost of Goods Sold		-550000
	(Manufacturing cost per unit * No. of Units Sold)
	(50+30+30) * 5000
	Less: Variable Selling & administrative Cost		-10000
	Less: Fixed Overhead Cost		-40000	(10*4000 Trees produced)
	Less: Fixed MARkETING Cost		-8000
	Net Operating Income		392000
d)	Under absorption costing, fixed manufactured overhead is treated as an expense only for those units which are produced and then sold. Remaining fixed overhead incurred during the year is charged to the cost of ending inventory. By this it becomes cost/expense only in the year in which it is sold. But under variable costing fixed manufacturing overhead become expense once its incurred irrespective of sale of inventory.