Explore BrainMass
Share

Income Statement for Full & Variable Costing

This content was STOLEN from BrainMass.com - View the original, and get the already-completed solution here!

1- Variable and Full Costing
The following information relates to Porter Manufacturing for fiscal 2006, the company's first year of operation.:

Selling price per unit $ 120
Direct material per unit $ 60
Direct labor per unit $ 20
Variable manufacturing overhead per unit $ 5
Variable selling cost per dollar of sales $ 0.10
Annual fixed manufacturing overhead $ 2,000,000
Annual fixed selling expense $ 1,000,000
Annual fixed administrative expense $ 800,000
Units produced $ 200,000
Units sold $ 170,000

A. Prepare an income statement using full costing
B. Prepare an income statement using variable costing
C. Calculate the amount of fixed manufacturing overhead that will be included in ending inventory under full costing and reconcile it to the difference between income computed under variable full costing.

2- Allocating Services Department Costs
World Airlines has three service departments: (1) ticketing, (2) baggage handling, and (3) engine maintenance. The service department costs are estimated for separate cost pools formed by department and are allocated to two revenue-producing departments: (1) domestic flights and (2) international flights. World does not differentiate between fixed and variable costs in making allocations. The following date relate to the allocations:

Budgeted Data
__________________________
Costs Air Miles
Ticketing $4,000,000
Baggage handling $2,000,000
Engine maintenance $6,000,000
Domestic flights 5,000,000
International flights 20,000,000

A. Allocate the service department costs to the revenue-producing departments using air miles as the allocation base.
B. Evaluate the cause-and-effect relationship resulting from the use of air miles as the allocation base. In which of the cost pools do you think the cause-and-effect relationship is the strongest? Suggest alternative allocation bases for the two remaining cost pools with the weakest cause-and-effect relationship.

See attached file for full problem description.

© BrainMass Inc. brainmass.com October 24, 2018, 8:34 pm ad1c9bdddf
https://brainmass.com/business/finance/income-statement-for-full-variable-costing-100679

Attachments

Solution Preview

1- Variable and Full Costing
The following information relates to Porter Manufacturing for fiscal 2006, the company's first year of operation.:

Selling price per unit $ 120
Direct material per unit $ 60
Direct labor per unit $ 20
Variable manufacturing overhead per unit $ 5
Variable selling cost per dollar of sales $ 0.10
Annual fixed manufacturing overhead $ 2,000,000
Annual fixed selling expense $ 1,000,000
Annual fixed administrative expense $ 800,000
Units produced $ 200,000
Units sold $ 170,000

First, we need to compute the unit product cost under both full and variable costing.

Absorption costing

Direct materials 60
Direct labor 20
Variable manufacturing overhead 5
Fixed manufacturing overhead ($2,000,000/200,000 units) 10
95

Variable costing

Direct materials 60
Direct labor 20
Variable manufacturing overhead 5
85

A. Prepare an income statement using full costing

Units Sold 170,000
Sales ($120 x 170,000 units) 20,400,000
Cost of Goods Sold Expense:
Beginning Inventory 0
Cost of Production:
Direct Materials ($60 x 200,000 units) 12,000,000
Direct Labor ($20 x 200,000 units) 4,000,000
Variable manufacturing overhead 1,000,000
Fixed manufacturing overhead 2,000,000
19,000,000
Total Costs ...

Solution Summary

This solution is comprised of a detailed explanation to prepare income statement for full costing and variable costing and allocating the service department costs to the revenue-producing departments using air miles as the allocation base.

$2.19
See Also This Related BrainMass Solution

Full and Variable Costing

2. MedCo, Inc. manufactures a specialized breathing instrument called the MCB1000. The firm has grown rapidly in recent years because of the product's low price and high quality. However, sales have declined this year due to increased competition and a decrease in the surgical procedures for which the MCB1000 is used. The firm is concerned about the decline in sales, especially the decline in operating income over the past year. The firm has hired a consultant to analyze the firm's profitability. The consultant provided the following information:

(see chart in attached file)

a. Using the full costing method, which MedCo's accountant used to prepare the annual financial statements, prepare the income statements for 2004 and 2005.
b. Using variable costing, prepare an income statement for each period, and explain the difference in net income from that obtained in requirement 1.
c. Write a brief explanation of the difference in income between variable costing and absorption costing.

View Full Posting Details