Acc561 Introduction to Management Accounting: 13-58 The Trapani Company

Acc561 Introduction to Management Accounting

13-58 Absorption and Variable Costing
The Trapani Company had the following actual data for 20X4 and 20X5: 20X4 20X5
Units of finished goods
Opening inventory – 2,000
Production 15,000 13,000
Sales 13,000 14,000
Ending Inventory 2,000 1,000

The basic production data at standard unit costs for the two years were
Direct materials $22
Direct labor 18
Variable factory overhead 4
Standard variable costs per unit 44

Fixed factory overhead was budgeted at $98,000 per year. The expected volume of production was 14,000 units so the fixed overhead rate was $98,000 ÷ 14,000 = $7 per unit.

Budgeted sales price was $75 per unit. Selling and administrative expenses were budgeted at variable, $9 per unit sold, and fixed, $80,000 per year.
Assume that there were absolutely no variances from any standard variable costs or budgeted selling prices or budgeted fixed costs in 20X4.
There were no beginning or ending inventories of work in process.

1. For 20X4, prepare income statements based on standard variable (direct) costing and standard absorption costing. (The next problem deals with 20X5.)
2. Explain why operating income differs between variable costing and absorption costing. Be specific.
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