Variable Cost and Net Operating Income

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ASSIGNMENT P 6-16 , P6-17 PROBLEM 6-16 Variable and Absorption Costing Unit Product Costs and Income Statements; Explanation of Difference in Net Operating Income [LO1, LO2, LO3] Wiengot Antennas, Inc., produces and sells a unique type of TV antenna. The company has just opened a new plant to manufacture the antenna, and the following cost and revenue data have been provided for the first month of the plant's operation in the form of a worksheet.

Because the new antenna is unique in design, management is anxious to see how profitable it will be and has asked that an income statement be prepared for the month. Required: 1. Assume that the company uses absorption costing. a. Determine the unit product cost. b. Prepare an income statement for the month. 2. Assume that the company uses variable costing. a. Determine the unit product cost. b. Prepare a contribution format income statement for the month. 3. Explain the reason for any difference in the ending inventory balances under the two costing methods and the impact of this difference on reported net operating income.

PROBLEM 6-17 Variable and Absorption Costing Unit Product Costs and Income Statements [LO1, LO2] Nickelson Company manufactures and sells one product. The following information pertains to each of the company's first three years of operations:

p. 262 During its first year of operations Nickelson produced 60,000 units and sold 60,000 units. During its second year of operations it produced 75,000 units and sold 50,000 units. In its third year, Nickelson produced 40,000 units and sold 65,000 units. The selling price of the company's product is $56 per unit. Required: 1. Compute the company's break-even point in units sold. 2. Assume the company uses variable costing: a. Compute the unit product cost for year 1, year 2, and year 3. b. Prepare an income statement for year 1, year 2, and year 3. 3. Assume the company uses absorption costing: a. Compute the unit product cost for year 1, year 2, and year 3. b. Prepare an income statement for year 1, year 2, and year 3. 4. Compare the net operating income figures that you computed in requirements 2 and 3 to the break-even point that you computed in requirement 1. Which net operating income figures seem counterintuitive? Why?

LEARNING OBJECTIVES FOR ASSIGNMENT. LO1, LO2, LO3 OVERVIEW OF VARIABLE AND ABSOPTION COSTING As you begin to read about variable LEARNING OBJECTIVE 1 and absorption costing income Explain how variable costing differs from statements in the coming pages, absorption costing and compute unit focus your attention on three key product costs under each method. concepts. First, both income statement formats include product costs and period costs, although they define these cost classifications differently. Second, variable costing income statements are grounded in the contribution format. They categorize expenses based on cost behavior—variable costs are reported separately from fixed costs. Absorption costing income statements ignore variable and fixed cost distinctions. Third, as mentioned in the paragraph above, variable and absorption costing net operating income figures often differ from one another. The reason for these differences always relates to the fact the variable costing and absorption costing income statements account for fixed manufacturing overhead differently. Pay very close attention to the two different ways that variable costing and absorption costing account for fixed manufacturing overhead. Variable Costing Under variable costing, only those manufacturing costs that vary with output are treated as product costs. This would usually include direct materials, direct labor, and the variable portion of manufacturing overhead. Fixed manufacturing overhead is not treated as a product cost under this method. Rather, fixed manufacturing overhead is treated as a period cost and, like selling and administrative expenses, it is expensed in its entirety each period. Consequently,...
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