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    Variable and Absorption Costing

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    Variable & Absorption Costing
    Chan Manufacturing Company data for 20X7 follow:

    Sales : 12,000 units at $17 each
    Actual Production 15,000 units
    Expected volume of production 18,000 units
    Manufacturing costs incurred
    Variable $120,000
    Fixed $63,000
    Nonmanufacturing costs incurred
    Variable $24,000
    Fixed $18,000

    1. Determine operating income for 20X7, assuming the firm uses the variable-costing approach to product costing. (Do not prepare a statement).

    2. Assume that there is no January 1, 20X7, inventory; no variances are allocated to inventory; and the firm uses a "full absorption" approach to product costing. Compute (a) the cost assigned to December 31, 20X7, inventory; and (b) operating income for the year ended December 31, 20X7. (do not prepare a statement)

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    Solution Preview

    1. Determine operating income for 20X7, assuming the firm uses the variable-costing approach to product costing. (Do not prepare a statement).

    Under variable costing, the fixed manufacturing cost is expensed fully.
    The cost per unit is only the variable cost.
    The cost per unit = 120,000/15,000 = $8
    The operating income = Sales - Variable costs - Fixed costs
    Sales = 12,000X17 = $204,000
    Variable costs = Variable cost of goods sold (12,000X8=96,000) + Non-manufacturing variable ...

    Solution Summary

    The solution explains how the determine the operating income and the value of ending inventory using variable and absorption costing

    $2.19

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