Question
5. Inventory Valuation under Absorption Costing and Variable Costing At the end of the first year of operations, 6,800 units remained in the finished goods
5. Inventory Valuation under Absorption Costing and Variable Costing
At the end of the first year of operations, 6,800 units remained in the finished goods inventory. The unit manufacturing costs during the year were as follows:
Direct materials | $29.50 | |
Direct labor | 15.40 | |
Fixed factory overhead | 7.40 | |
Variable factory overhead | 6.50 |
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 | $ |
Variable costing | $ |
6. Variable Costing Income Statement
The following data were adapted from a recent income statement of Bluth Company:
(in millions) | ||
Sales | $218,210 | |
Operating costs: | ||
Cost of products sold | $104,740 | |
Marketing, administrative, and other expenses | 69,830 | |
Total operating costs | $174,570 | |
Income from operations | $43,640 |
Assume that the variable amount of each category of operating costs is as follows:
(in millions) | ||||
Cost of products sold | $58,920 | |||
Marketing, administrative, and other expenses | 28,370 |
a. Based on the data given, prepare a variable costing income statement for Bluth Company, assuming that the company maintained constant inventory levels during the period.
Bluth Company | ||
Variable Costing Income Statement (assumed) | ||
(in millions) | ||
$ | ||
$ | ||
$ | ||
Fixed costs: | ||
$ | ||
$ |
b. If Bluth Company reduced its inventories during the period, what impact would that have on the income from operations determined under absorption costing?
If Bluth Company reduced its inventories during the period, then the cost of products sold would fixed costs allocated to the beginning inventories. Thus, the total fixed costs of products sold on the absorption costing income statement would be , and the income from operations would be .
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