Inventory Valuation under Absorption Costing and Variable Costing

At the end of the first year of operations, 5,800 units remained in the finished goods inventory. The unit manufacturing costs during the year were as follows:

Direct materials	$30.00
Direct labor	20.90
Fixed factory overhead	7.20
Variable factory overhead	6.30

Determine the cost of the finished goods inventory reported on the balance sheet under (a) the absorption costing concept and (b) the variable costing concept.

Absorption costing	$fill in the blank 1
Variable costing	$fill in the blank 2

Variable and Absorption CostingThree Products

Winslow Inc. manufactures and sells three types of shoes. The income statements prepared under the absorption costing method for the three shoes are as follows:

Winslow Inc. Product Income StatementsAbsorption Costing For the Year Ended December 31, 20Y1
	Cross Training Shoes		Golf Shoes		Running Shoes
Revenues	$336,100		$191,600		$164,800
Cost of goods sold	(174,800)		(93,900)		(110,400)
Gross profit	$161,300		$97,700		$54,400
Selling and administrative expenses	(138,700)		(70,300)		(90,800)
Operating income	$22,600		$27,400		$(36,400)

In addition, you have determined the following information with respect to allocated fixed costs:

	Cross Training Shoes		Golf Shoes		Running Shoes
Fixed costs:
Cost of goods sold	$53,800		$24,900		$23,100
Selling and administrative expenses	40,300		23,000		23,100

These fixed costs are used to support all three product lines and will not change with the elimination of any one product. In addition, you have determined that the effects of inventory may be ignored.

The management of the company has deemed the profit performance of the running shoe line as unacceptable. As a result, it has decided to eliminate the running shoe line. Management does not expect to be able to increase sales in the other two lines. However, as a result of eliminating the running shoe line, management expects the profits of the company to increase by $36,400.

Question Content Area

a. Are managements decision and conclusions correct?

Managements decision and conclusion are

correctincorrect

. The profit

willwill not

be improved because the fixed costs used in manufacturing and selling running shoes

willwill not

be avoided if the line is eliminated.

Question Content Area

b. Prepare a variable costing income statement for the three products. Enter a net loss as a negative number using a minus sign.

Winslow Inc. Variable Costing Income StatementsThree Product Lines For the Year Ended December 31, 20Y1

	Cross Training Shoes	Golf Shoes	Running Shoes
Contribution marginManufacturing marginRevenuesVariable cost of goods soldVariable selling expenses	$- Select -	$- Select -	$- Select -
Contribution marginManufacturing marginRevenuesVariable cost of goods soldVariable selling expenses	- Select -	- Select -	- Select -
Contribution marginManufacturing marginRevenuesVariable cost of goods soldVariable selling expenses	$- Select -	$- Select -	$- Select -
Contribution marginManufacturing marginRevenuesVariable cost of goods soldVariable selling and administrative expenses	- Select -	- Select -	- Select -
Contribution marginManufacturing marginRevenuesVariable cost of goods soldVariable selling expenses	$- Select -	$- Select -	$- Select -
Fixed costs:
Fixed contribution marginFixed manufacturing costsFixed salesVariable cost of goods manufacturedVariable cost of goods sold	$- Select -	$- Select -	$- Select -
Fixed selling and administrative expensesFixed manufacturing marginVariable cost of goods manufacturedVariable cost of goods soldVariable selling and administrative expenses	- Select -	- Select -	- Select -
Total fixed costs	$fill in the blank 0f1a8efe8fef010_29	$fill in the blank 0f1a8efe8fef010_30	$fill in the blank 0f1a8efe8fef010_31
Operating income (loss)	$fill in the blank 0f1a8efe8fef010_32	$fill in the blank 0f1a8efe8fef010_33	$fill in the blank 0f1a8efe8fef010_34

Question Content Area

c. Use the report in (b) to determine the profit impact of eliminating the running shoe line, assuming no other changes.

If the running shoes line were eliminated, then the contribution margin of the product line would

increasebe eliminated

and the fixed costs

wouldwould not

be eliminated. Thus, the profit of the company would actually

improvedecline

by $fill in the blank 2fc19c056fa3ff6_4. Management should keep the line and attempt to improve the profitability of the product by

increasingdecreasing

prices,

increasingdecreasing

volume, or

increasingreducing

costs.