Question

Race Track Motors assembles and sells motor vehicles and uses standard costing Actual data relating to April and May 2017 are as follows (Click the icon to view the data) The selling price per vehicle is $30,000. The budgeted level of production used to calculate the budgeted fixed manufacturing cost per unit is 500 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 Data Table i Requirements - X April May Unit data Beginning inventory 1. Prepare April and May 2017 income statements for Race Track 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 Production 500 450 Sales Print Done $ 11,000 $ 2,000 4950 COD 11,000 2,000 Variable costs Manufacturing cost per unit produced Operating (marketing) cost per unit sold Fixed costs Manufacturing costs Operating (marketing) costs (330,000) 4,620,000 $ 2200,000 $ 750,000 2,200,000 750,000 840,000 ck Answer. Print Done Jear All Check Answer

Answer 1

Solution of the above question is as under:

A) Income Statement for April 2017 And May 2017:
a) Absorption Costing Income Statement
Race Track Motors
Income Statement (Absorption Costing)
	Apr-17		May-17
Particulars		Amount($)		Amount($)
Sales(450 Units * $30000)//(420 Units * $30000)		13500000		12600000
Less: Cost of Goods Sold:
Opening Inventory (0 Units * $15400^)//(50 Units * $16500^^)	0		825000
Add: Cost of Goods Produced(500 Units * $15400)//(400 Units * $16500)	7700000		6600000
Cost of Goods Available for Sale	7700000		7425000
Less: Closing Inventory(50 Units*$15400)//(30 Units*$16500)	770000	6930000	495000	6930000
Gross Profit		6570000		5670000
Less: Selling and Administration Expenses
Variable Selling and Administration Expenses(450 Units*$2000)//(420 Units*$2000)	900000		840000
Fixed Selling and Administration Expenses	750000	1650000	750000	1590000
Net Operating Income		4920000		4080000
^ Manufacturing Expenses per Unit	^^ Manufacturing Expenses per Unit
Variable Expenses + Fixed Manufacturing Overhead Expenses	Variable Expenses + Fixed Manufacturing Overhead Expenses
$11000 + ($2200000/500 Units)	$11000 + ($2200000/400 Units)
$11000 + $4400	$11000 + $5500
$15,400	$16,500
b) Variable Costing Income Statement
Race Track Motors
Income Statement (Variable Costing)
	Apr-17		May-17
Particulars		Amount($)		Amount($)
Sales(450 Units * $30000)//(420 Units * $30000)		13500000		12600000
Less: Cost of Goods Sold:
Opening Inventory (0 Units * $11000)//(50 Units * $11000)	0		550000
Add: Cost of Goods Produced(500 Units * $11000)//(400 Units * $11000)	5500000		4400000
Variable Cost of Goods Available for Sale	5500000		4950000
Less: Closing Inventory(50 Units*$11000)//(30 Units*$11000)	550000	4950000	330000	4620000
Gross Contribution Margin		8550000		7980000
Less: Variable Selling and Administration Expenses (450*$2000)//(420*$2000)		900000		840000
Contribution Margin		7650000		7140000
Less: Period Expenses
Fixed Manufacturing Overheads	2200000		2200000
Fixed Selling and Administration Expenses	750000	2950000	750000	2950000
Net Operating Income		4700000		4190000
Reconciliation to explain the difference between Net Operating Income
	Apr-17	May-17
Particulars	Amount ($)	Amount ($)
Net Operating Income under Absorption Costing	4920000	4080000
Net Operating Income under Variable Costing	4700000	4190000
Difference in Net Operating Income	220000	-110000
Change in Inventory (Closing - Opening)	50 Units	20 Units
Fixed Manufacturing Overhead Deferred in Inventory (50 Units * $ 4400)/ Fixed Manufacturing Overhead Expenses released from Inventory (20 Units* $5500)	220000	-110000

Reason for Difference in Net Operating Income

In the Month of April 2017, the net operating income under Absorption Costing is $220000 more than the net operating income under Variable Costing because when production is more than sales, the fixed manufacturing overhead is deferred in Inventory that causes a higher Net Operating Income under Absorption Costing than under Variable Costing.

In the Month of May 2017, the net operating income under Absorption Costing is $110000 less than the net operating income under Variable Costing because when production is less than sales, the fixed manufacturing overhead is released from Inventory that causes a lower Net Operating Income under Absorption Costing than under Variable Costing.