Question

Problem Two (Try-It! 9.2 from the 16 edition of the textbook) Toys started 2017 with no inventories. Durine the year their expected and actual production was 50.000 units, of which they sold 24.000 units + $50ch Cost data for the year is as follows: Manufacturing costs incurred: Variable S 525.000 Fixed Marketing costs incurred: $ 372.000 Variable $ 144,800 Fixed $ 77,400 Calculate ZB Toys' operating income under (a) variable costing, and (b) absorption costing. Explain why operating income differs under the two approaches. Vanable 525,000 50,000 Finished Good = 17.50 Posorption 572 poo 30.000 12.40 = 29.90 FG beg produced o COGS 30,000 80,000 24.000 sold 6,000 Coos 2 of 10

Answer 1

1. Operating income under variable costing

Revenues ($ 50 *24000)	$        1,200,000
Less : Variable cost of goods sold [(525,000/30,000)X24,000]	$         (420,000)
Less: Variable marketing costs	$         (144,800)
Contribution margin	$            635,200
Less: Fixed manufacturing costs	$         (372,000)
Fixed marketing costs	$            (77,400)
Operating income	$            185,800

2. Operating income under absorption costing

Revenues	$        1,200,000
Less: cost of goods sold [(525,000 * 0.8) + (372,000 * 0.8)]	$         (717,600)
Gross margin	$            482,400
Less: Variable marketing costs	$         (144,800)
Fixed marketing costs	$            (77,400)
Operating income	$            260,200

The basis of difference between variable and absorption costing is the accounting or treatment of manufacturing costs. If inventory levels change, operating income will differ between the two methods because of difference in accounting for fixed manufacturing costs.

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