Question

In: Accounting

Pronghorn Industries makes artificial Christmas trees. The unit costs for producing a tree are: Direct materials...

Pronghorn Industries makes artificial Christmas trees. The unit costs for producing a tree are: Direct materials $26 Direct labor $14 Variable overhead $14 Fixed overhead $4 The company also incurs $1 per tree in variable selling and administrative costs and $4,300 in fixed marketing costs. At the beginning of the year the company had 870 trees in the beginning Finished Goods Inventory. The company produced 2,050 trees during the year. Sales totaled 1,600 trees at a price of $103 per tree.

(a) Based on absorption costing, what was the company’s operating income for the year?

(b) Based on variable costing, what was the company’s operating income for the year?

(c) Assume that in the following year the company produced 2,050 trees and sold 2,820. Based on absorption costing, what was the operating income for that year? Based on variable costing, what was the operating income for that year?

Expert Solution

a)

Operating income under Absorption costing
Sales ($103 *1600 units)	164,800
Variable manufacturing Overheads:
Direct material ($26 * 2050 units)	53,300
Direct labor ($14 *2050 units)	28,700
Variable factory Overheads ($14 *2050 units)	28,700
Fixed factory Overheads ($4 *2050 units)	8,200
	118,900
Add: Opening Stock ($58 * 870 units)	50,460
Cost of goods available for sale	169,360
Less: Closing Stock ($58 * 1,320 units)	(76,560)
Cost of Goods Sold	92,800
Add: Selling & Admin. Expenses- Variable ($1 * 1600 units)	1,600
Fixed	4.300
Total Cost of Sales	98,700
Profit (Sales- Total cost)	66,100

Closing Stock= Opening Stock + Production - Sales

= 870 units + 2,050 units - 1,600 units

= 1,320 units

Opening and Closing stock will be valued at $58 per unit, i.e. 26+14+14+4= 58

b)

Operating income under Variable costing
Sales ($103 *1600 units)	164,800
Variable manufacturing Overheads:
Direct material ($26 * 2050 units)	53,300
Direct labor ($14 *2050 units)	28,700
Variable factory OH ($14 *2050 units)	28,700
Total variable production cost ($54 *2050 units)	110,700
Add: Opening stock ($54 * 870 units)	46,980
	157,680
Less: Closing Stock ($54 * 1320 units)	(71,280)
Cost of goods sold	86,400
Add: Variable S &A Overheads ($1 *1600 units)	1,600
Total variable costs	88,000
Contribution (Sales - Variable costs)	76,800
Fixed Overhead- Factory OH	8,200
S &A OH	4,300
Total Fixed cost	12,500
Profit (Contribution - Fixed cost)	64,300

Closing Stock= Opening Stock + Production - Sales

= 870 units + 2,050 units - 1,600 units

= 1,320 units

Opening and Closing stock will be valued at $58 per unit, i.e. 26+14+14= 54

c)

Operating income under Absorption costing
Sales ($103 *2820 units)	290,460
Variable manufacturing Overheads:
Direct material ($26 * 2050 units)	53,300
Direct labor ($14 *2050 units)	28,700
Variable factory Overheads ($14 *2050 units)	28,700
Fixed factory Overheads ($4 *2050 units)	8,200
	118,900
Add: Opening Stock ($58 * 1320 units)	76,560
Cost of goods available for sale	195,460
Less: Closing Stock ($58 * 550 units)	(31,900)
Cost of Goods Sold	163,560
Add: Selling & Admin. Expenses- Variable ($1 * 2,820 units)	2,820
Fixed	4.300
Total Cost of Sales	170,680
Profit (Sales- Total cost)	119,780

Opening stock of the following year will be closing year of past year which was 1,320 units.

Closing stock will be= 1,320 + 2,050 - 2,820= 550 units @ $58 per unit.

Operating income under Variable costing
Sales ($103 *2820 units)	290,460
Variable manufacturing Overheads:
Direct material ($26 * 2050 units)	53,300
Direct labor ($14 *2050 units)	28,700
Variable factory OH ($14 *2050 units)	28,700
Total variable production cost ($54 *2050 units)	110,700
Add: Opening stock ($54 * 1320 units)	71,280
	181,980
Less: Closing Stock ($54 * 550 units)	(29,700)
Cost of goods sold	152,280
Add: Variable S &A Overheads ($1 *2820 units)	2,820
Total variable costs	155,100
Contribution (Sales - Variable costs)	135,360
Fixed Overhead- Factory OH	8,200
S &A OH	4,300
Total Fixed cost	12,500
Profit (Contribution - Fixed cost)	122,860

Opening stock of the following year will be closing year of past year which was 1,320 units.

Closing stock will be= 1,320 + 2,050 - 2,820= 550 units @ $54 per unit.

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