Absorption & Variable Costing

 

Central Avenue Manufacturing, Inc. began operations on January 1, 2016. The company uses actual costing and does not generally carry Work in Process Inventories at the end of the year. Variable product costs per unit were the same for 2016, 2017 and 2018 and total $75 per unit. Total Fixed Overhead Costs are $954,000 per year. Variable Selling and Administrative Costs are $14 for each unit sold. Fixed Selling and Administrative Costs are $456,000 per year. The Selling Price is $105

 per unit for all three years. Production and Sales figures (in units) for three years are below.

 

                    2016              2017              2018

 

Production (units)      100,000 units       106,000 units       95,400 units

Sales (units)              95,000 units         95,000 units         110,000 units

 

The company uses the FIFO method to assign cost to any units left in ending Finished Goods Inventory.

 

 

TASK:

 

A. 

1. Prepare, in good form, two Income Statements for the year ending December 31, 2017: One using Absorption costing and one using Variable Costing. Use the formats that I used in the class example for Chapter 6. (Remember your proper headings for both statements.

 

2. Then, prepare one Reconciliation to explain the difference in the Net Operating Income figures. Again, use the format that I used in the class example.

 

B.  In a management meeting at the end of December 2018, you are provided with a Variable   Income Statement for year ending December 31, 2018.  The Variable Income Statement     showed Net Operating Income of $350,000. WITHOUT DOING ANY INCOME STATEMENTS FOR THE YEAR ENDING DECEMBER 31, 2018, prepare one Reconciliation for that year (2018)) that   will give us the Net Operating Income (Loss) figure using Absorption Costing. In other words,   what was the Net Operating Income (Loss) for the year ending December 31, 2018? You are     ONLY TO PREPARE one RECONCILIATION STATEMENT.