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# Income Statement for Full & Variable Costing

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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.

#### 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
Fixed manufacturing overhead (\$2,000,000/200,000 units) 10
95

Variable costing

Direct materials 60
Direct labor 20
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
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.

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