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Explanation of Absorption and Variable Costing Income Statement

Include in your answer these steps:

1-Calculate the absorption rate for the fixed costs.
Note: This must be done before calculating the variable costing income statement.
2-Calculate the total absorption of fixed and variable costs.
3-Discuss how production affected the absorption of fixed costs for each year.
4-Discuss how production affected the absorption of fixed costs for the budget for 2005.
5-Discuss how a change to throughput costing would change the income statement.

Need calculations done in the Absorption & Variable Costing Income Statements. Along with the above 5 items.

Attached are the Absorption & Variable Costing Income Statements, the financial reports for the past 3 years, the activity report for the past 3 years,


Solution Preview

First of all, to answer your questions in the message - you made a very good point about a little difference in those numbers. How do we come up with them? Well, as you correctly pointed out, the Cost of Goods Sold - COGS ($2,289,600 as you took as an example) is the sum of COGS of the 2 products that they have. So in this case, it would be $2,289,600 = 1,660,800 + 628,800. Now we have the Production Cost per Gallon for each product and for both of them together (as you can notice, there isn't really a relation between those numbers). So there are 2 ways for us to get that number $2,289,600:
(1) We simply multiply Cost per Gallon ($3.58) by the Total number of gallons sold (640,000), which would give us $2,291,200.
(2) We compute the COGS for each product separately and we add up those 2 numbers.
As we can see there is a discrepancy between $2,289,600 listed (obtained by the second method) and $2,291,200 (obtained by the first one). Both are legitimate methods to do the calculations. The reason for that discrepancy is the fact that we have floating point computations involved, specifically division. Originally, when we compute the Cost per Gallon, we divide Total Cost of Production by the Total number of gallons Produced. That division would give us a number with 20 and more digits in the decimal part. Surely enough we don't want to keep all those digits when reporting in the financial statement. Hence we round them. That causes ...

Solution Summary

About 500 words assist you with this, including computations.