# Champion Motors assembles and sells motor vehicles and uses standard costing. Actual data...

## Question:

Champion Motors assembles and sells motor vehicles and uses standard costing. Actual data relating to April and May 2014 are as follows:

April May
Unit data
Beginning inventory 0 150
Production 500 425
Sales 350 525
Variable costs
Manufacturing cost per unit produced $12,000$12,000
Operating (marketing) cost per unit sold 2,400 2,400
Fixed costs
Manufacturing costs $2,400,000$2,400,000
Operating (marketing) costs 650,000 650,000

The selling price per vehicle is $27,000. 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. Required: Prepare April and May 2014 income statements for Champion Motors under (a) variable costing and (b) absorption costing. Prepare a numerical reconciliation and explanation of the difference between operating income for each month under variable costing and absorption costing. ## Income Statements - Variable & Absorption Costing: The net operating income calculated in the variable and in the absorption costing income statements differs because the way fixed manufacturing overhead costs are treated in these two costing systems differ. ## Answer and Explanation: #### Champion Motors #### Income Statement - Variable Costing for April & May 2014 April May Units sold 350 525 Sales (@$27,000 per unit) $9,450,000$14,175,000
Variable cost of goods Sold (@ $12,000 per unit) 4,200,000 6,300,000 Margin$5,250,000 $7,875,000 Variable operating expense (@$2,400 per unit) 840,000 1,260,000
Contribution margin $4,410,000$6,615,000
Fixed operating expenses 650,000 650,000
Total Fixed Costs $3,050,000$3,050,000
Income from operations $1,360,000$3,565,000

#### Income Statement - Absorption Costing for April & May 2014

April May
Units sold 350 525
Sales (@ $27,000 per unit)$9,450,000 $14,175,000 Cost of Goods Sold Beginning inventory 2,520,000 Variable Manufacturing cost 6,000,000 ($12,000 x 500)
5,100,000
Fixed Manufacturing cost 2,400,000 2,400,000
Goods Available for Sale $8,400,000$10,020,000
Less Ending inventory 2,520,000
($8,400,000 x 150/500) (871,304) ($10,020,000 x 50/575)
Total Cost of goods sold $5,880,000$9,148,696
Gross Profit $3,570,000$5,026,304
Operating Expenses ($650,000 +$2,400 per unit) 1,490,000 1,910,000
Net Income $2,080,000$3,116,304

Reconciliation:

April May Total
Income Absorption costing $2,080,000$3,116,304
Income (loss) Variable costing 1,360,000 3,565,000
Difference $720,000$(448,696) $271,304 Value of ending inventory:$271,304 Absorption costing 871,304 Variable costing 600,000 (\$12,000 x 50 units) Difference