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Answer:
Big Sky Creations Company
1. Income Statement for May and June using Absorption Costing
May June
Sales $4,500,000 $4,500,000
Cost of goods sold 3,240,000 3,672,000
Gross profit $1,260,000 $828,000
Total expenses 152,000 152,000
Net Income $1,108,000 $676,000
2. Income Statement using variable costing concept:
May June
Sales $4,500,000 $4,500,000
Total variable manufacturing 3,480,000 2,784,000
8 Variable $72,000 $72,000
Beginning inventory (cost) 355,200
Total manufacturing cost $3,552,000 $3,211,200
Contribution $948,000 $1,288,800
Fixed expenses:
Fixed manufacturing cost 120,000 120,000
9 Fixed selling and admin. 80,000 80,000
Total expenses $152,000 $152,000
Net Income $796,000 $1,136,800
3A. The reason for the differences in operating income in (1) and (2) for May is due to how the fixed cost of manufacturing is absorbed in the ending inventory and transferred to June.
3B. The reason for the differences in operating income in (1) and (2) for June is the accounting with all variable costs included in the beginning inventory.
4. Big Sky did not operate more profitably. The difference is the accounting with full costs and only variable costs.
Explanation:
a) Data and Calculations
Units produced = 40,000
Units sold = 36,000
Ending Inventory 4,000
Unit selling price = $125 ($4,500,000/36,000)
1 Sales $4,500,000
2 Manufacturing costs:
3 Direct materials $960,000
4 Direct labor 2,000,000
5 Variable Overhead cost 520,000
Total variable manufacturing $3,480,000
6 Fixed manufacturing cost 120,000
Total manufacturing cost $3,600,000
7 Selling and administrative expenses:
8 Variable $72,000
9 Fixed 80,000
Total expenses 152,000
June:
Beginning inventory 4,000
Units produced = 32,000
Units sold = 36,000
Ending Inventory 0
Unit selling price = $125 ($4,500,000/36,000)
1 Sales $4,500,000
2 Manufacturing costs:
3 Direct materials $768,000
4 Direct labor 1,600,000
5 Variable Overhead cost 416,000
Total variable manufacturing $2,784,000
6 Fixed manufacturing cost 120,000
Total manufacturing cost $2,904,000
7 Selling and administrative expenses:
8 Variable $72,000
9 Fixed 80,000
Total expenses 152,000
Facts for preparing income statements:
May June
Sales $4,500,000 $4,500,000
Total variable manufacturing 3,480,000 2,784,000
Fixed manufacturing cost 120,000 120,000
Total manufacturing cost $3,600,000 $2,904,000
7 Selling and administrative expenses:
8 Variable $72,000 $72,000
9 Fixed 80,000 80,000
Total expenses $152,000 $152,000
Unit cost of goods manufactured:
Absorption costing $90 ($3,600,000/40,000) for May
$102 ($3,264,000/32,000) for June ($2,904,000 + 360,000)
Cost of goods sold: May $3,240,000 June $3,672,000
Unit cost of goods manufactured:
Variable costing
for May= $88.80 ($3,552,000/40,000) per unit
for June = $100.35 ($3,211,200/32,000) ($2,856,000 + 355,200)
Cost of goods sold: May $3,196,800 June $3,612,600
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