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Absorption vs. Variable Costing

Lang Glass Company makes stained glass lamps. Each lamp that it sells for $210 per lamp requires $12 of direct materials and $48 of direct labor. Fixed overhead costs are expected to be $135,000 per year. Lang Glass expects to sell 1,000 lamps during the coming year. Selling and administrative expenses were zero.

A. Prepare income statements using absorption costing, assuming that Lang Glass makes 1,000, 1,250, and 1,500 lamps during the year.

B. Prepare income statements using variable costing, assuming that Lang Glass makes 1,000, 1,250, and 1,500 lamps during the year.

C. Explain why Lang Glass may produce income statements under both absorption and variable costing formats. Your answer should include an explanation of the advantages and disadvantages associated with the use of the two reporting formats.

Please help. Thank you

Solution Preview

Dear student,
Solution is provided in a separate excdel file attached and it contains the following statements.
1 Statement of total production cost per unit under Absorption costing and variable costing approach.
2 Income statement uder Absorption costing for three levels of out put.
3 Income statement under variable costing for three levels of out put.
4 Short Nots on cretain points.
The conceptual part of the answer is produced herewith and it is also provided separately in the word document attached.
Absorption Costing Vs Contribution Approach Or Variable costing
(a) In absorption costing a portion of fixed manufacturing overhead is allocated to each unit produced during the period.
(b) It combines fixed and variable overheads while determining the production costs.
© Absorption costing considers all cost of production as product cost.
(d) Practically It makes no distinction between fixed and variable ...

Solution Summary

Absorption versus variable costing is examined.