Question

Game Source manufactures video games that it sells for $43 each. The company uses a fixed manufacturing overhead allocation rate of $6 per game. Assume all costs and production levels are exactly as planned. The following data are from Game Source's first two months in business during 2018: (Click the icon to view the data.) Read the requirements. Requirement 1. Compute the product cost per game produced under absorption costing and under variable costing. October 2018 November 2018 Variable Absorption Variable Absorption costing costing costing costing Total product cost per game Requirement 2a. Prepare monthly income statements for October and November, including columns for each month and a total column, using absorption costing. Game Source Absorption Costing Income Statement October 2018 November 2018 Total

Answer 1

1 Product cost per game under absorption costing and under variable costing Absorption costing Variable costing Variable manufacturing cost per game $17 $17 Fixed manufacturing overhead allocation rate $6 $0 $23 $17 October 2018 November 2018 Absorption Absorption Variable costing Variable costing costing costing $23 $17 $23 $17 Total product cost per game 2a. Game Source Absorption Costing Income Statement October 2018 November 2018 No. of Units Sold 1400 3,000 Net Sales Revenue @ $43 per game $60,200 $129,000 Cost of Goods Sold @ $23 per game $32,200 $69,000 Gross Profit $28,000 $60,000 Selling and Administrative Costs ($11,000 + $7*units sold $20,800 $32,000 Operating Income $7,200 $28,000 Total 4400 $189,200 $101,200 $88,000 $52,800 $35,200 2b. Game Source Absorption Costing Income Statement October 2018 November 2018 No. of Units Sold 1400 3,000 Net Sales Revenue @ $43 per game $60,200 $129,000 Variable costs (units sold * ($17 + $7)) $33,600 $72,000 Contribution Margin $26,600 $57,000 Fixed costs ($14,400 + $11,000) $25,400 $25,400 Operating Income $1,200 $31,600 Total 4400 $189,200 $105,600 $83,600 $50,800 $32,800

3 In October, the operating income is higher under Absorption costing. The primary reason for this is that Fixed Manufacturing overhead costs are distributed across the entire production run as part of the unit cost. Under the absorption costing method, $6,000 of fixed manufacturing overhead costs are not expensed and remain in Finished goods inventory. In November, the operating income is higher under Variable costing. The primary reason for this is because $6,000 of fixed manufacturing overhead that is contained in the units in ending inventory under absorption costing is not contained in the units of ending inventory under variable costing. As inventory declines, as was the case in November, October's fixed manufacturing overhead costs that absorption costing assigned to that inventory are expensed in November. This decreases November's absorption costing income. 4 October 31, 2018 November 30, 2018 Absorption Absorption Variable costing Variable costing costing costing $23,000 $17,000 $9,200 $6,800 ($23*1000) ($17*1000) ($23*400) $17*400) Finished Goods Inventory The higher inventory under Absorption costing is representative fixed costs that are expensed in variable costing, but contained in inventory under absorption costing. Under absorption costing, the difference in the product cost per game is contained in the inventory, whereas under variable costing, the difference in the product cost per game is expensed as a period cost. Working Notes 1 Calculation of finished good inventory October 0 Beginning balance (in units) Add: Units Produced Total units available Less: Units Sold Closing Inventory balance 2,400 2,400 1,400 1,000 November 1,000 2,400 3,400 3,000 400