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Huron Chalk Company manufactures sidewalk chalk which it sells online by the box at $25 per unit....

Question:

Huron Chalk Company manufactures sidewalk chalk which it sells online by the box at $25 per unit. Huron uses an actual costing system, which means that the actual costs of direct material, direct labor, and manufacturing overhead are entered into work-in-progress inventory. The actual application rate for manufacturing overhead is computed each year; actual manufacturing overhead is divided by actual production (in units) to compute the application rate. Information for Huron's first two years of operation is as follows:

Year 1 Year 2
Sales (in units) 2,500 2,500
Production (in units) 3,000 2,000
Production costs:
Variable manufacturing costs $10,500 $7,000
Fixed manufacturing overhead 21,000 21,000
Selling and Administrative Expenses:
Variable 12,500 12,500
Fixed 10,000 10,000

Reconcile Huron's operating income reported under absorptions and variable costing, during each year, by computing the following two amounts on each income statement:

Cost of goods sold

Fixed cost (expensed as period expense)

What was Huron's total operating income across both years under absorption costing and under variable costing?

What was the total sales revenue across both years under absorption costing and under variable costing?

What was the total of all costs expensed on the operating income statements across both years under absorption costing and under variable costing?

Subtract the total costs expensed across both years requirement 4 from the total sales revenue across both years requirement 3;

(a) under absorption costing and (b) under variable costing.

Comment on the results obtained in requirements 1, 2, 3, and 4 in light of the following assertion: Timing is the key in distinguishing between absorption and variable costing.

Variable Costing:

In a variable costing, all fixed manufacturing expenses are considered as expense at the time goods are produced or manufactured. This costing method does not consider whether such goods are already sold or still remained in the inventory.

Answer and Explanation:

(a)

Income Statement under Absorption Costing

Year 1 Year 2
Sales in units 2,500 2,500
Selling Price per unit $25 $25
Sales $62,500 $62,500
Less: Cost of Goods Sold
Variable Mfr Cost $8,750 $8,750.
Fixed Mfr Cost* $17,500 $24,500
Gross Profit $36,250 $29,500
Less: Selling & Admin Cost
Variable $12,500 $12,500
Fixed $10,000 $10,000
Operating income $13,750 $6,750
*Fixed Mfr cost $17,500 $24,500

(21,000/ 3000 * 2,500) : (21,000 + Balance of year 1)

(b)

Income Statement under Variable Costing

Year 1 Year 2
Sales $62,500 $62,500
Less: Variable Cost
Variable mfr cost (5.3 per unit) $8,750 $8,750
Variable Selling Cost $12,500 $12,500
Contribution $41,250 $41,250
Less: Fixed Costs
Mfr cost $21,000 $21,000
Selling and admin cost $10,000 $10,000
Operating Income $10,250 $10,250

Requirement 1 Year 1 Year 2
COGS under absorption $26,250 $33,250
Less: Variable Mfr cost under variable $8,750 $8,750
$17,500 $24,500
Fixed mfr overhead under variable 21,000 21,000
Difference ($3,500) $3,500
Operating income under variable $10,250 $10,250
Less: Operating income under absorption $13,750 $6,750
Difference in Operating income ($3,500) ($3,500)

Requirement 2 Total Operating Income
Absorption Costing $20,500
Variable Costing $20,500

Requirement 3 Total Sales Revenue
Absorption Costing $125,000
Variable Costing $125,000

Requirement 4 Cost Expensed
Absorption Costing $104,500
Variable Costing $104,500

Requirement 5 Amount
Absorption Costing $20,500
Variable Costing $20,500

Learn more about this topic:

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Variable Costing: Method, Formula & Advantages

from Financial Accounting: Help and Review

Chapter 13 / Lesson 5
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