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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 Summary

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

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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 ...

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