Shastri Bicycle of Bombay, India, produces an inexpensive, yet rugged, bicycle for use on the city’s crowded streets that it sells for 930 rupees. (Indian currency is denominated in rupees, denoted by Picture.) Selected data for the company’s operations last year follow:
Units in beginning inventory 0
Units produced 17,000
Units sold 4,000
Units in ending inventory 13,000
Variable costs per unit:
Direct materials Picture 91
Direct labor Picture 316
Variable manufacturing overhead Picture 33
Variable selling and administrative Picture 16
Fixed costs:
Fixed manufacturing overhead Picture 765,000
Fixed selling and administrative Picture 459,000
The absorption costing income statement prepared by the company’s accountant for last year appears below:
Sales Picture 3,720,000
Cost of goods sold 1,940,000
Gross margin 1,780,000
Selling and administrative expense 523,000
Net operating income Picture 1,257,000
2.
value:
10.00 points
Required:
1.
Determine how much of the ending inventory consists of fixed manufacturing overhead cost deferred in inventory to the next period. (Omit the "Picture" sign in your response.)
Total fixed manufacturing overhead in ending inventory Picture
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3.
value:
10.00 points
2.
Prepare an income statement for the year using variable costing. (Input all amounts as positive values except losses which should be indicated by a minus sign. Omit the "Picture" sign in your response.)
Variable Costing Income Statement
Picture
Variable expenses:
Picture
Fixed expenses:
Picture
To determine how much of the ending inventory consists of fixed manufacturing overhead cost deferred in inventory to the next period, we need to calculate the fixed manufacturing overhead per unit and then multiply it by the number of units in the ending inventory.
Fixed manufacturing overhead per unit can be calculated by taking the total fixed manufacturing overhead divided by the number of units produced:
Fixed manufacturing overhead per unit = Fixed manufacturing overhead / Units produced
In this case, the fixed manufacturing overhead is given as 765,000 rupees and the units produced are 17,000. Therefore:
Fixed manufacturing overhead per unit = 765,000 / 17,000 = 45 rupees per unit
To calculate the amount of fixed manufacturing overhead cost deferred in inventory, we multiply the fixed manufacturing overhead per unit by the number of units in the ending inventory:
Fixed manufacturing overhead in ending inventory = Fixed manufacturing overhead per unit * Units in ending inventory
In this case, the units in ending inventory are given as 13,000. Therefore:
Fixed manufacturing overhead in ending inventory = 45 * 13,000 = 585,000 rupees
So, the amount of the ending inventory consisting of fixed manufacturing overhead cost deferred to the next period is 585,000 rupees.
To prepare an income statement using variable costing, we need to calculate the variable expenses and the fixed expenses.
Variable expenses can be calculated by multiplying the variable costs per unit by the number of units sold. The variable costs per unit are given as:
Direct materials: 91 rupees
Direct labor: 316 rupees
Variable manufacturing overhead: 33 rupees
Variable selling and administrative: 16 rupees
Variable expenses = (Direct materials + Direct labor + Variable manufacturing overhead + Variable selling and administrative) * Units sold
In this case, the units sold are given as 4,000. Therefore:
Variable expenses = (91 + 316 + 33 + 16) * 4,000 = 1,528,000 rupees
Fixed expenses can be calculated by adding the fixed manufacturing overhead and the fixed selling and administrative expenses:
Fixed expenses = Fixed manufacturing overhead + Fixed selling and administrative
In this case, the fixed manufacturing overhead is given as 765,000 rupees and the fixed selling and administrative expenses are given as 459,000 rupees. Therefore:
Fixed expenses = 765,000 + 459,000 = 1,224,000 rupees
Now, we can prepare the income statement using variable costing:
Variable Costing Income Statement
Sales: 3,720,000 rupees
Variable expenses: 1,528,000 rupees
Fixed expenses: 1,224,000 rupees
Net operating income = Sales - Variable expenses - Fixed expenses
Net operating income = 3,720,000 - 1,528,000 - 1,224,000 = 968,000 rupees
So, the net operating income using variable costing is 968,000 rupees.
1. To determine how much of the ending inventory consists of fixed manufacturing overhead cost deferred in inventory to the next period, we need to calculate the fixed manufacturing overhead cost per unit.
Fixed manufacturing overhead cost per unit = Total fixed manufacturing overhead / Total units produced
Fixed manufacturing overhead cost per unit = 765,000 / 17,000
Fixed manufacturing overhead cost per unit = 45 rupees
Now, we can calculate the amount of fixed manufacturing overhead cost deferred in inventory to the next period.
Fixed manufacturing overhead cost deferred in inventory = Fixed manufacturing overhead cost per unit * Units in ending inventory
Fixed manufacturing overhead cost deferred in inventory = 45 * 13,000
Fixed manufacturing overhead cost deferred in inventory = 585,000 rupees
Therefore, the ending inventory consists of 585,000 rupees of fixed manufacturing overhead cost deferred to the next period.
2. The income statement using variable costing is as follows:
Sales: 3,720,000 rupees
Variable expenses:
- Direct materials: 91 rupees * 4,000 units sold = 364,000 rupees
- Direct labor: 316 rupees * 4,000 units sold = 1,264,000 rupees
- Variable manufacturing overhead: 33 rupees * 4,000 units sold = 132,000 rupees
- Variable selling and administrative: 16 rupees * 4,000 units sold = 64,000 rupees
Total variable expenses = 364,000 + 1,264,000 + 132,000 + 64,000 = 1,824,000 rupees
Contribution margin = Sales - Total variable expenses
Contribution margin = 3,720,000 - 1,824,000 = 1,896,000 rupees
Fixed expenses:
- Fixed manufacturing overhead: 765,000 rupees
- Fixed selling and administrative: 459,000 rupees
Total fixed expenses = 765,000 + 459,000 = 1,224,000 rupees
Net operating income = Contribution margin - Total fixed expenses
Net operating income = 1,896,000 - 1,224,000 = 672,000 rupees
Therefore, the income statement using variable costing shows a net operating income of 672,000 rupees.