Acc561 Introduction to Management Accounting: 13-A4 Examine the Trahn Company’s simplified

Acc561 Introduction to Management Accounting
13-A4 Comparison of Absorption and Variable Costing
Examine the Trahn Company’s simplified income statement based on variable costing. Assume that the budgeted volume for absorption costing in 20X7 and 20X8 was 1,400 units and that total fixed costs were identical in 20X7 and 20X8. There is no beginning or ending work in process.
Income Statement
Year Ended December 31, 20X8
Sales, 1,280 units @ $12 15,360
Deduct variable costs
Beginning inventory, 110 units @ $7 770
Variable manufacturing cost of goods manufactured, 1,200 units @ $7 8,400
Variable manufacturing cost of goods available for sale 9,170
Ending inventory, 30 units @ $7 210
Variable manufacturing cost of goods sold 8,960
Variable selling and administrative expenses 600
Total variable costs 9,560
Contribution margin 5,800
Deduct fixed costs
Fixed factory overhead at budget 4,200
Fixed selling and administrative expenses 350
Total fixed costs 4,550
Operating income 1,250

1. Prepare an income statement based on absorption costing. Assume that actual fixed costs were equal to budgeted fixed costs.
2. Explain the difference in operating income between absorption costing and variable costing. Be specific.
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