Cost Accounting-Prepare Absorption and Variable Income Statements for 3 years - SSOG
Sun Shine Orange Grove (SSOG) is a family-owned business that grows oranges for the production of orange juice. SSOG manufactures pulp-free and high-pulp orange juice. The oranges are harvested, brought to the juicing plant, and sorted by type and grade for further processing into orange juice and cider. SSOG feels it has placed itself in a unique niche market catering to people who insist on organic foods and beverages. SSOG has only a few competitors. Most large orange juice manufactures do not want to supply this relatively small market.
Sun Shine Orange Grove has been in business for many years as an orange juice manufacturer. But the organic orange drink business, SSOG, has only been in operation for the last 3 years. SSOG is run as a completely separate business. Therefore, the orange drinks can be certified as organic, and profitability is tracked for the organic manufacturing business.
SSOG has been operating based on an actual cost reporting system. It does not have a formal costing system.
You were recently hired as the cost accountant for Sun Shine Orange Grove. You have been asked by the owners to put together a costing system for the orange drink manufacturing process and an operating budget for 2006. The purpose of this is to track the actual cost against an established budget and costing system, which will allow for performance tracking.
ASSIGNMENT
Evaluate the operating performance for SSOG for 2003 through 2005 by completing two income statements for each year: an absorption costing income statement and a variable costing income statement. The CVP income statement format must be used for the preperation of the variable costing.
Write a memo on your findings.
Include in your answer these steps:
? Calculate the absorption rate for the fixed costs.
Note: This must be done before calculating the variable costing income statement.
? Calculate the total absorption of fixed and variable costs.
? Discuss how production affected the absorption of fixed costs for each year.
? Discuss how production affected the absorption of fixed costs for the budget for 2005.
? Discuss how a change to throughput costing would change the income statement.
The Income Statements are not to be prepared breaking down each product(Orange Juice and Orange Drink) they are to be prepared with the combined figures.
This question has the following supporting file(s):
- Sun Shine Orange Grove.xls
- Sunshne Grove Activity Report.xls
- Absorption and Variable Costing Instructor Notes.doc
- ACC445-T4-absorption.doc
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- Sun+Shine+Orange+Grove.xls
Extracted Content from Question Files:
- Absorption and Variable Costing Instructor Notes.doc
*Absorption and Variable Costing
(S.O. 10) There are two approaches to product costing.
a. Under full or absorption costing all manufacturing costs are charged to the
product.
b. Under variable costing, only direct materials, direct labor, and variable
manufacturing overhead costs are product costs; fixed manufacturing
overhead costs are recognized as period costs (expenses) when incurred.
The income statement under variable costing is prepared in the cost-volume-profit
format.
The effects of the alternative costing methods on income from operations are:
Effects on Income
Circumstance From Operations
Units produced exceed units sold Income under absorption
costing is higher than under
variable costing
Units produced are less than Income under absorption
costing
units sold is lower than under variable
costing
Units produced equal units sold Income will be equal under both
approaches
*26. The use of variable costing in product costing is acceptable only for internal use
by management. It cannot be used in determining products costs in financial
statements prepared in accordance with generally accepted accounting principles
because it understates inventory costs.
*I. Variable Costing.
1. Under full or absorption costing, all manufacturing costs are
charged to, or absorbed by, the product.
2. Under variable costing, only direct materials, direct labor,
and variable manufacturing overhead costs are considered
product costs. Fixed manufacturing overhead costs are
recognized as period costs (expenses) when incurred.
3. Selling and administrative expenses are period costs under
both absorption and variable costing.
4. The CVP income statement format is used with variable
costing.
5. When units produced exceed units sold, income under
absorption costing is higher than under variable costing
(because fixed overhead costs are included in the inventory
rather than expensed).
6. When units produced are less than units sold, income under
absorption costing is lower than under variable costing
(because the ending inventory cost will be higher under
absorption costing than under variable costing).
7. The use of variable costing is acceptable only for internal
use by management. Absorption costing must be used in
determining product costs in financial statements and for
income tax purposes.
*Example 1
Ally, Inc. developed the following unit information for June, its first month of
operations:
Per Unit Total
Costs
Sales price $11.00
Direct materials 3.50
Direct labor 1.50
Variable manufacturing overhead .70
Variable selling and administrative expenses .30
Fixed selling and administrative expenses $2,000
Fixed manufacturing overhead 6,000
During June, 2,000 units were produced and 1,900 units were sold.
Instructions
Determine the difference in net income using absorption costing and variable
costing. Explain why this difference exists.
*Solution example 1
Absorption Costing Variable Costing
Sales revenue ($11 x 1,900) $20,900 $20,900
Direct materials ($3.50 x 1,900) $6,650 $6,650
Direct labor ($1.50 x 1,900) 2,850 2,850
Variable man. Overhead 1,330 1,330
($.70x1900)
Variable selling & admin. (.3 x 570
1900)
Total variable costs 11,400
Fixed man overhead (19/20 x 5,700 6,000
6,000)
Total cost of goods sold 16,530
Fixed selling & admin. expenses 2,000 2,000
Variable selling & admin. expenses 570
Net income $1,800 $1,500
The difference of $300 ($1,800 − $1,500) exists because inventory under the
absorption costing method includes a portion of fixed manufacturing overhead
which is not included as inventory cost under the variable costing method.
Variable Costing
Sales revenue $280,000
Variable costs 84,000
Contribution margin 196,000
Fixed costs 56,000
Net income $140,000
Absorption Costing
Sales revenue $280,000
Cost of good sold 70,000
Gross margin 210,000
Expenses 57,000
Net income $153,000
- ACC445-T4-absorption.doc
Absorption rate= total cost per unit = Fixed cost per unit + variable cost per unit
Fixed costs per unit = Total fixed costs/ number of units produced
Variable costs per unit = Total Variable costs/ number of units produced
Example of format for Absorption/variable costing
Variable costing 2003 2004 2005 Budget 2005
Sales 55,000 60000 70000 75000
Variable costs 41,000 50000
Contribution margin 14,000
Fixed Cost 12,000 13000 15000
Net Income 2,000
Units produced 10000 14000 20000
Fixed cost per unit $1.2 .92 .75
Variable cost per unit 4.1
Absorption rate 5.3
Fixed cost per unit $12000/10000 = $1.20
Variable cost per unit = $41000/10000= $4.1
Total unit cost = = $5.3
Absorption costing
Sales 55,000 60000 70000 75000
Cost of goods sold 43,000 46000
Gross Margin 12,000
Expenses 10,000
Net Income 2,000
