Absorption and Variable Costing Comparisons

Red Arrow Blueberries manufactures blueberry jam. Because of bad weather, its blueberry crop was small. The following data have been gathered for the summer quarter of 2017:

Beginning inventory (cases)0Cases produced9,000Cases sold8,700Sales price per case$ 60Direct materials per case$ 8Direct labor per case$ 9Variable manufacturing overhead per case$ 3Total fixed manufacturing overhead$ 300,000Variable selling and administrative cost per case$ 2Fixed selling and administrative cost$ 48,000

(a) do a functional income statement for the quarter using absorption costing. (Round answers to the nearest dollar. Do not use negative signs with your answers,EXCEPTif you calculate a net loss.)

RED ARROW BLUEBERRIES

Functional (Absorption Costing) Income Statement

For the Summer Quarter 2017SalesAnswer

Cost of goods sold:Variable costsAnswer

Fixed costsAnswer

Goods availableAnswer

Ending inventoryAnswer

Answer

Gross profitAnswer

Operating expenses:Variable selling and administrativeAnswer

Fixed selling and administrativeAnswer

Answer

Net income (loss)Answer

(b) Prepare a contribution income statement for the quarter using variable costing. (Do not use negative signs with your answers,EXCEPTif you calculate a net loss.)

RED ARROW BLUEBERRIES

Contribution (Variable Costing) Income Statement

For the Summer Quarter 2017SalesAnswer

Variable expenses:ManufacturingAnswer

Selling and administrativeAnswer

Answer

Contribution marginAnswer

Fixed expenses:Manufacturing overheadAnswer

Selling and administrativeAnswer

Answer

Net income (loss)Answer

(c) What is the value of ending inventory under absorption costing? (Round answer to thenearest whole number.)

$Answer

(d) What is the value of ending inventory under variable costing?

$Answer

(e) The difference in the value of ending inventory in parts (c) and (d) is explained by the following difference between absorption and variable costing:

Variable costing assigns only variable manufacturing costs to products while absorption costing assigns both variable and fixed manufacturing costs to products.

Variable costing treats all manufacturing costs as variable costs while absorption costing treats only variable manufacturing costs as variable costs.

Absorption costing treats fixed costs as period costs while variable costing treats fixed costs as product costs.

Absorption costing treats all manufacturing costs as period costs while variable costing treats only variable manufacturing costs as period costs.