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# Dallas

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## Gross Margin

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Demo 6-1: Prepare & Reconcile Variable & Absorption Costing Income Statements -- Production Const Sales Variesi!en: Linden Company manufactures and sells a single product. Cost data for the product follow:Variable costs per unit:Direct materials 6#\$\$ Direct labor  1%#\$\$ Variable factory overhead #\$\$ %%#\$\$ Variable selling & administrative '#\$\$ Total variable costs per unit %(#\$\$ Fied costs per month:Fied manufacturing overhead %\$,\$\$\$ )#\$\$ Fied selling & administrative 1)\$,\$\$\$ Total fied cost per month %\$,\$\$\$ '\$#\$\$ 1(#\$\$ !roduction and sales data for ay and #une\$ the first two months of operations\$ are as follows: \$#\$\$ *nits*nitsC+ange inProducedSoldIn!entor ay '\$,\$\$\$ %6,\$\$\$ %\$ #une '\$,\$\$\$ ',\$\$\$ '%\$(Total 6\$,\$\$\$ 6\$,\$\$\$  presented below: a.une )ales 1,\$\$,\$\$\$ 1,'6\$,\$\$\$ Cost of goods sold*eginning inventory \$ 1%\$,\$\$\$ +,-\$ dd cost of goods manufactured /\$\$,\$\$\$ /\$\$,\$\$\$ +/\$+/\$0oods available for sale /\$\$,\$\$\$ 1,\$%\$,\$\$\$ Less ending inventory 1%\$,\$\$\$ \$ +,-\$ Cost of goods sold+12\$ 0)\$,\$\$\$ 1,\$%\$,\$\$\$ +,\$-\$0ross margin %6\$,\$\$\$ '\$,\$\$\$ )elling & administrative epenses %(),\$\$\$ %)%,\$\$\$ +-32\$+-2-\$4perating income %,\$\$\$ (),\$\$\$ Reuired:1#Determine t+e unit product cost under:a#Absorption costingb#Variable costing  bsorptionVariableCostingCostingDirect materials 6#\$\$ 6#\$\$ Direct labor  1%#\$\$ 1%#\$\$ The product sells for \$  per unit. 5ote: Contribution margin per unit is 6ncome statements prepared by the accounting department\$ using absorption costing\$ are  Variable manufacturing overhead #\$\$ #\$\$ Fied manufacturing overhead '+-%\$78\$(2. +8. +--. %#Prepare !ariable costing income statements 2or a and .une using t+econtribution margin 2ormat approac+# Linden CompanyVariable Costing 6ncome )tatementsFor the onths of ay and #une ay#une)ales '-9\$  +%; 8%\$  +%( 1,\$\$,\$\$\$ 1,'6\$,\$\$\$ Variable epenses:Variable cost of goods sold31-\$ +31-\$ +1%2\$ 1%2\$ Variable selling & administrative12\$ 12\$ ,-\$ ,-\$ Total variable epenses+93\$ +23\$ Contribution margin 1(#\$\$ +8/\$ +3,\$ Fied epenses:8/\$ 3,\$ Fied manufacturing overhead %\$,\$\$\$ %\$,\$\$\$ Fied selling & administrative 1)\$,\$\$\$ 1)\$,\$\$\$ Total fied epenses %\$,\$\$\$ %\$,\$\$\$ 4perating income 'loss('+8\$(+/\$ '#Reconcile t+e !ariable costing and absorption costing net operating income 2igures ay#une4perating variable costing income 'loss('+8\$(+/\$  d<ustment for Change in inventory during ay!roduction '\$,\$\$\$ )ales %6,\$\$\$ 6ncrease in inventory%\$ Fied 4= rate+2. Fied + deferred in inventory+8-\$ 8-\$ 3perating absorption costing income 4loss5 %,\$\$\$  d<ustment for Change in inventory during #une!roduction '\$,\$\$\$ )ales ',\$\$\$ Decrease in inventory'%\$(Fied 4= rate+2. Fied + released from inventory'+8-\$('8-\$( 3perating absorption costing income 4loss5 (),\$\$\$ #+e compan7s Accounting Department +as determined t+e brea8-e!en point to be 4 \$ - %(5 9 1( *pon recei!ing t+is 2igure, t+e president commented, +ere7s somet+ing strange +ere#+e controller sas t+at t+e brea8-e!en point is %),\$\$\$ per mont+# ;et <e sold onl%),\$\$\$ units per mont+, computed as 2ollo<s:=i>ed cost per mont+?*nit contribution margin 9 %\$,\$\$\$ ? 1( per unit 9 %),\$\$\$ units %6,\$\$\$ units in a, and t+e income statement <e recei!ed s+o<ed a %,\$\$\$ pro2it#  @+ic+ 2igure do <e belie!e Prepare a brie2 e>planation o2 <+at +appened on t+e aincome statement# The brea>?even analysis above assumes that all of Linden Company@s +%-\$ of monthly fiedcosts will be recogniAed as epenses each month in its monthly income statements. 6f LindenCompany uses a variable costing approach to measuring operating income\$ then this assumption will hold true. =owever\$ if the absorption costing approach is used to measure operating income\$this assumption will hold true only when production is eBual to sales. 6n ay\$ production wasgreater than sales by %\$ units. Therefore\$ +8-\$ '%\$  +2( of fied 4= costs was deferred in ending inventory to future periods. This +8-\$ of deferred fied 4= costs will berecogniAed in future periods as epense items when the inventory units to which these costs areassigned are sold. Fewer units need to be sold to *7 since recogniAed fied costs are +8-\$less.Current sales %6,\$\$\$#\$\$ *7  '+%-\$ ? +8-\$(7+,3 -3\$299.91 )ales greater than *7,88.88 C per unit sold 1(#\$\$ 4perating income ?? -9\$ sales %,\$\$\$#\$\$ Thus\$ both are correct depending on underlying assumptions. 5ormal *7 analysis assumes production  sales. This assumption eBuates operating incomemeasured under variable costing with operating income measured under absorption costing.)ince production is greater than sales during ay\$ operating income is greater when measuredusing an absorption costing approach than when using a variable costing approach.   ant,
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