Question

Absorption and Variable Costing Comparisons
Red Arrow Blueberries manufactures blueberry jam. Because of bad weather, its blueberry crop was small. The following data have been gathered for the summer quarter of last year:

Beginning inventory (cases)	0
Cases produced	8,000
Cases sold	7,000
Sales price per case	$ 115
Direct materials per case	$ 25
Direct labor per case	$ 40
Variable manufacturing overhead per case	$ 10
Total fixed manufacturing overhead	$ 192,000
Variable selling and administrative cost per case	$ 2
Fixed selling and administrative cost	$ 38,000

• Functional Income Statement
• Contribution Income Statement
• Ending Inventory Analysis

(a) Prepare a functional income statement for the quarter using absorption costing. (Round answers to the nearest dollar. Do not use negative signs with your answers, EXCEPT if you calculate a net loss.)

RED ARROW BLUEBERRIES Functional (Absorption Costing) Income Statement For the Summer Quarter (Last Year)
Sales		Answer
Cost of goods sold:
Variable costs	Answer
Fixed costs	Answer
Goods available	Answer
Ending inventory	Answer	Answer
Gross profit		Answer
Operating expenses:
Variable selling and administrative	Answer
Fixed selling and administrative	Answer	Answer
Net income (loss)		Answer

• Ending Inventory Analysis

(c) What is the value of ending inventory under absorption costing? (Round answer to the nearest whole number.)
$Answer

(d) What is the value of ending inventory under variable costing?
$Answer

(e) The difference in the value of ending inventory in parts (c) and (d) is explained by the following difference between absorption and variable costing:

Variable costing assigns only variable manufacturing costs to products while absorption costing assigns both variable and fixed manufacturing costs to products.

Variable costing treats all manufacturing costs as variable costs while absorption costing treats only variable manufacturing costs as variable costs.

Absorption costing treats fixed costs as period costs while variable costing treats fixed costs as product costs.

Absorption costing treats all manufacturing costs as period costs while variable costing treats only variable manufacturing costs as period costs.

• Ending Inventory Analysis

(b) Prepare a contribution income statement for the quarter using variable costing. (Do not use negative signs with your answers, EXCEPT if you calculate a net loss.)

RED ARROW BLUEBERRIES Contribution (Variable Costing) Income Statement For the Summer Quarter (Last Year)
Sales		Answer
Variable expenses:
Manufacturing	Answer
Selling and administrative	Answer	Answer
Contribution margin		Answer
Fixed expenses:
Manufacturing overhead	Answer
Selling and administrative	Answer	Answer
Net income (loss)		Answer

Answer 1

a	Under Absorption costing
					Note 1	Inventory Valuation
	Revenue		805000			Direct Material Cost	25	200000
						Dirrect labour cost	40	320000
	Cost of goods Sold			-525000		Direct Manufacturing	10	80000
	Variable Manufacturing cost	600000				Fixed manufacturing cost	192000
	Fixed manufacturing cost	192000				TOTAL cogs		792000
	Goods Avaialble	792000
	Ending inventory	99000	693000			Units produced		8000
	Gross profit		112000			Cost per unit		99	24
	Variable selling and admin expense		14000	2
	Fixed Selling & Admin Expense		38000			Cost of goods sold			115
						units sold		99x	7000
	operating income		60000			Cost of goods sold		693000

c	Closing inventory value under absorption costing
	Closing units			1000
				99	Refer to Note 1
	Inventory			99000
d	Closing inventory value under Variable Costing
	Closing units			1000
				75	Refer to Note 2
E	Reconciliation Between value of inventory of absorption costing and variable costing
	Reconcialiation
	operating income under absorption		60000
	Fixed over head dieffered		24000	1000
	operating income under Variable		36000
	Fixed manufacturing		192000
			8000
			24
	Closing inventory unit		1000
			24000

	Production		8000
	Sales		7000	115		805000
b	Under Variable Costing
					Note2	Cost of goods sold calculation
	Revenue		805000			Direct Material Cost	25	200000
						Dirrect labour cost	40	320000
	Varaible cost of goods sold		525000			Direct Manufacturing	10	80000
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