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se the reciprocal sel vices n mputing Departments to the Deposits and Loans Depa 7.30 (appendix) Variable and absorption costing Higgins Ltd began operations on 1 January, and achieved the following results for the year: 24000 units LO11 Sales Selling price Manufacturing costs: 20000 $30 per unit $8 per unit $4 per unit $6 per unit $200000 nsc Direct material d Direct labour Variable overhead Fixed manufacturing overhead Selling and administrative costs: $2 per unit sold $20000 25000 units Production Required: 1 Prepare an absorption costing income statement for Higgins Ltd. 2 Prepare a variable costing contribution margin statement for Higgins Ltd. 3 Reconcile the differences between the profits under the two statements by: (a) Identifying the areas where the statements differ. (Using the short-cut method
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Variable costs per unit Manufacturin Direct materials Direct labor Variable manufacturing overhead Variable selling and administrative 8.00 4.00 6.00 2.00 20.00 Fixed costs Fixed manufacturing overhead Fixed selling and administrative expenses ear. 200,000 20,000 Year 1 Opening Balance Units produced Units sold Ending Invento 25,000 24,000 1,000 Selling Price per unit 30.00 Variable Costin ear 1 Per Unit Per Unit $8.00 $4.00 Direct materials Direct labor Variable manufacturing overhead Unit product cost 8.00 4.00 6.00 18.00 6.00 $ $18.00 Variable Costing Income Statement Per Unit / riod vear 1 Units sold 24,000 720,000 30.00 Sales Variable expenses: Variable cost of goods sold Variable selling and administrative Total variable expenses Contribution margin (Sales-VC S 18.00 432,000 48,000 $ 480,000 $ 240,000 2.00 $ Fixed expenses: Fixed manufacturing overhead Fixed selling and administrative Total fixed expenses: Net operating income (lossl (Cont-FC 200,000 20,000 200,000 20,000 220,000 20,000

Absorption costin Year 1 Units produced Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Total Manufacturing Cost Units produced Unit product cost Fixed manufacturing overhead per unit Per Unit 25,000 200,000 4.00 100,000 6.00 150,000 $200,000 $ 650,000 25,000 26.00 8.00 $ 8.00 Absorption Costing Income Statement ear 1 24,000 S 30.00720,000 Units sold Sales Cost of goods sold (Unit product cost x units sold Gross margin Selling and administrative expenses (Fixed + Variable Net operating income (loss S 624,000 $96,000 $68,000 $28,000 Working Notes Cost of goods sold Opening Balance Units produced Units sold Ending Invento 25,000 24,000 1,000 Opening Balance Add: Cost of production Less: Ending Invento Cost of goods sold 0 $ 650,000 26,000 624,000

tecondi is si a aYears year 1 Variable costing Net Operating Income (loss) Add: Fixed manufacturing overhead deferred in inventory under absorption costing (closing inventory opening inventory) x fixed manufacturing overhead per unit produced. (10000 x $8.00) 20,000 8,000 Absorption costing net operating income loss $28,000 The fixed cost per unit produces Fixed manufacturing overhead/units produced-$8 The total fixed cost associated with the 1,000 fishing units in inventory is: 1,000 x $8 $8000 This amount would be included in ending inventory under absorption costing, but would be reported as an operating expense under variable costing. Thus, under variable costing. operating income would be $8,000 less than under absorption costing.

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