Question

ABSORPTION COSTING VERSUS THROUGHPUT COSTING
The book The Goal illustrates the concept of throughput costing. For the problem below
prepare all journal entries and determine the impact on the income statement of the
differences between absorption costing (normal accounting) and throughput costing.
HINT: pay very careful attention to definitions of throughput, inventory and operating
expense from the book
BUDGETED MANUFACTURING COSTS
DIRECT MATERIAL				$                 20	PER UNIT
DIRECT LABOR				$                   2	PER UNIT
VARIABLE OVERHEAD				$                 10	PER UNIT
FIXED OVERHEAD				$      150,000
YEAR 1
NO BEGINNING INVENTORY
ACTUAL COSTS OF PRODUCTION EQUALS ABOVE MANUFACTURING COSTS
PURCHASE DIRECT MATERAILS OF				$      200,000
INCUR SELLING AND ADMIN COSTS OF				$        80,000
#UNITS PRODUCED				10000
# UNITS SOLD				9000
SALES PRICE OF UNITS SOLD				$              100
YEAR 2
THERE IS BEGINNIN GINVENTORY
ACTUAL COSTS OF PRODUCTION EQUALS ABOVE MANUFACTURING COSTS
PURCHASE DIRECT MATERAILS OF				$      160,000
INCUR SELLING AND ADMIN COSTS OF				$        80,000
#UNITS PRODUCED				8000	UNITS
# UNITS SOLD				9000	UNITS
SALES PRICE OF UNITS SOLD				$              100
REQUIRED:
1. PREPARE ALL JOURNAL ENTRIES FOR BOTH YEARS TO REFLECT THE ABOVE TRANSACTIONS UNDER NORMAL ABSORPTION COSTING AND UNDER THROUGHPUT COSTING

Answer 1

Absorption Costing Journal Entires				Throughtput Costing Journal Entires
Year 1				Year 1
Inventory-Raw Materials	200000			Inventory-Raw Materials	200000
To Cash/AP		200000		To Cash/AP		200000
Salary Expenses	20000			Salary Expenses	20000
To Cash		20000		To Cash		20000
Variable Overhead Expenses	100000			Variable Overhead Expenses	100000
To Cash/AP		100000		To Cash/AP		100000
Fixed Expenses	150000			Fixed Expenses	150000
To Cash/AP		150000		To Cash/AP		150000
Admin and Selling Expenses	80000			Admin and Selling Expenses	80000
To Cash/AP		80000		To Cash/AP		80000
WIP Inventory	470000			WIP Inventory	200000
To Direct Materials Consumed		200000		To Direct Materials Consumed		200000
To Direct Labour		20000
To Variable Overheads		100000		Finished Goods Inventory	200000
To Fixed Overheads		150000		To WIP Inventory		200000
Finished Goods Inventory	470000			Cost of Goods Sold	180000
To WIP Inventory		470000		To Finished Goods Inventory		180000
Cost of Goods Sold	423000			Cash	900000
To Finished Goods Inventory		423000		To Sales		900000
Cash	900000
To Sales		900000
Year 2				Year 2
Inventory-Raw Materials	160000			Inventory-Raw Materials	160000
To Cash/AP		160000		To Cash/AP		160000
Salary Expenses	16000			Salary Expenses	16000
To Cash		16000		To Cash		16000
Variable Overhead Expenses	80000			Variable Overhead Expenses	80000
To Cash/AP		80000		To Cash/AP		80000
Fixed Expenses	150000			Fixed Expenses	150000
To Cash/AP		150000		To Cash/AP		150000
Admin and Selling Expenses	80000			Admin and Selling Expenses	80000
To Cash/AP		80000		To Cash/AP		80000
WIP Inventory	406000			WIP Inventory	160000
To Direct Materials Consumed		160000		To Direct Materials Consumed		160000
To Direct Labour		16000
To Variable Overheads		80000		Finished Goods Inventory	160000
To Fixed Overheads		150000		To WIP Inventory		160000
Finished Goods Inventory	406000			Cost of Goods Sold	180000
To WIP Inventory		406000		To Finished Goods Inventory		180000
Cost of Goods Sold	453000			Cash	900000
To Finished Goods Inventory		453000		To Sales		900000
Cash	900000
To Sales		900000
Income Statement Year 1(Absorption Costing)				Income Statement Year 1(Throughput Costing)
Sales	900000			Sales	900000
Less: Cost of Sales	423000			Less: Cost of Sales	180000
Gross Profit	477000			Gross Profit	720000
Less: Selling and Admin Cost	80000			Less Direct Labour	20000
Net Profit	397000			Less: Variable Cost	100000
				Less : Fixed Cost	150000
Income Statement Year 2(Absorption Costing)				Less: Selling and Admin Cost	80000
				Net Profit	370000
Sales	900000
Less: Cost of Sales	453000			Income Statement Year 2(Throughput Costing)
Gross Profit	447000
Less: Selling and Admin Cost	80000			Sales	900000
Net Profit	367000			Less: Cost of Sales	180000
				Gross Profit	720000
				Less Direct Labour	16000
				Less: Variable Cost	80000
				Less : Fixed Cost	150000
				Less: Selling and Admin Cost	80000
				Net Profit	394000