Question

Part I: Quarryman Corporation manufactures and sells 50-inch electronic products that can do just about anything any electronic device can do. They use a standard cost system. Actual data relating to January, February, and March 2019 are as follows:

	January	February	March
Unit data:
Beginning Inventory	0	100	100
Production	1,550	1,450	1,500
Sales	1,450	1,450	1,490
Variable Costs:
Manufacturing Cost per unit produced	$1,000	$1,000	$1,000
Marketing cost per unit sold	$700	$700	$700
Fixed Costs:
Manufacturing Costs	$515,000	$515,000	$515,000
Marketing Costs	$140,000	$140,000	$140,000

The selling price per unit is $3,500. The budgeted level of production used to calculate the budgeted fixed manufacturing costs was 1,550 units in January, 1,450 units in February, and 1,500 units in March. They were so accurate at predicting their production volumes there are no production volume variances to worry about. Also, there are no price, efficiency or spending variances.

1. Prepare income statements for Quarryman Corporation in January, February, and March 2019 using: (a) variable costing and (b) absorption costing. Prepare your income statement to the nearest dollar.

To keep it simple you can assume that the cost of product sold per unit in February and March is the same as cost of units produced during that month. In other words, you do not need to assume that 100 of the units sold in February were sold at January’s cost per unit, and the same goes for March. This is the same as assuming the firm is using the LIFO inventory assumption.

2. Calculate and explain the difference in operating income for January, February, and March under variable costing and absorption costing. In other words, provide reconciliation between the absorption costing and the variable costing operating income calculations. If the operating profit calculations are different, quantify the difference and explain where it is. Inevitably there may be some very minor rounding issues when you do reconciliation. Do not be concerned with minor rounding issues. I will not deduct any points if your reconciliation is a few dollars off due to rounding.

Answer 1

	January	February	March
Beginning inventory	0	100	100
Production	1,550	1,450	1,500
Goods available for sale	1,550	1,550	1,600
Units sold	1,450	1,450	1,490
Ending inventory	100	100	110
The fixed manufacturing costs per unit and total manufacturing costs per unit under absorption costing are :-
	January	February	March
(a) Fixed manufacturing costs	$515,000	$515,000	$515,000
(b) Units produced	1,550	1,450	1,500
(c)=(a)÷(b) Fixed manufacturing costs per unit	$332	$355	$343
(d) Variable manufacturing costs per unit	$1,000	$1,000	$1,000
(e)=(c)+(d)   Total manufacturing costs per unit	$1,332	$1,355	$1,343
a) Absorption Costing
	January		February		March
Revenues @ $3500 per unit		$5,075,000		$5,075,000		$5,215,000
Cost of goods sold
Beginning inventory	$0		$135,517		$134,333
Variable manufacturing costs	1,550,000		1,450,000		1,500,000
Fixed manufacturing costs	515,000		515,000		515,000
Cost of goods available for sale	2,065,000		2,100,517		2,149,333
Deduct ending inventory	133,226		135,517		147,767
Cost of goods sold		1,931,774		1,965,000		2,001,567
Gross margin		3,143,226		3,110,000		3,213,433
Operating costs
Variable operating costs	1,015,000		1,015,000		1,043,000
Fixed operating costs	140,000		140,000		140,000
Total operating costs		1,155,000		1,155,000		1,183,000
Operating income		$1,988,226		$1,955,000		$2,030,433
b) Variable Costing
	January		February		March
Revenues		$5,075,000		$5,075,000		$5,215,000
Variable costs
Beginning inventory	$0		$100,000		$100,000
Variable manufacturing costs	1,550,000		1,450,000		1,500,000
Cost of goods available for sale	1,550,000		1,550,000		1,600,000
Ending inventory	100,000		100,000		110,000
Variable cost of goods sold	1,450,000		1,450,000		1,490,000
Variable operating costs	1,015,000		1,015,000		1,043,000
Total variable costs		2,465,000		2,465,000		2,533,000
Contribution margin		2,610,000		2,610,000		2,682,000
Fixed costs
Fixed manufacturing costs	515,000		515,000		515,000
Fixed operating costs	140,000		140,000		140,000
Total fixed costs		655,000		655,000		655,000
Operating income		$1,955,000		$1,955,000		$2,027,000
2)
	Absorbtion costing Operating Income	-	Variable Costing Operating Income		=	Fixed manufacturing cost in ending inventory	-	Fixed manufacturing cost in beginning inventory
Jan	$1,988,226	-	$1,955,000	$33,226	=	33,226		$0	$33,225.81
Feb.	$1,955,000	-	$1,955,000	$0	=	35,517		$35,517	$0.00
Mar.	$2,030,433	-	$2,027,000	$3,433	=	37,767		$34,333	$3,433.33
The difference between absorption and variable costing is due solely to moving fixed manufacturing costs into inventories as inventories increase (as in January) and out of inventories as they decrease (as in March).