Question
Chataqua Can Company manufactures metal cans used in the food-processing industry. A case of cans sells for $25. The variable costs of production for one
Chataqua Can Company manufactures metal cans used in the food-processing industry. A case of cans sells for $25. The variable costs of production for one case of cans are as follows:
Direct material | $ | 6.00 | |
Direct labor | 3.00 | ||
Variable manufacturing overhead | 5.00 | ||
Total variable manufacturing cost per case | $ | 14.00 | |
Variable selling and administrative costs amount to $0.50 per case. Budgeted fixed manufacturing overhead is $400,000 per year, and fixed selling and administrative cost is $40,500 per year. The following data pertain to the companys first three years of operation.
Year 1 | Year 2 | Year 3 | |||||||
Planned production (in units) | 80,000 | 80,000 | 80,000 | ||||||
Finished-goods inventory (in units), January 1 | 0 | 0 | 23,000 | ||||||
Actual production (in units) | 80,000 | 80,000 | 80,000 | ||||||
Sales (in units) | 80,000 | 57,000 | 91,500 | ||||||
Finished-goods inventory (in units), December 31 | 0 | 23,000 | 11,500 | ||||||
Actual costs were the same as the budgeted costs.
Required:
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Prepare operating income statements for Chataqua Can Company for its first three years of operations using:
A. Absorption costing.- B. Variable costing.
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Reconcile Chataqua Can Companys operating income reported under absorption and variable costing for each of its first three years of operation. Use the shortcut method.
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Suppose that during Chataquas fourth year of operation actual production equals planned production, actual costs are as expected, and the company ends the year with no inventory on hand.
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What will be the difference between absorption-costing income and variable-costing income in year 4?
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What will be the relationship between total operating income for the four-year period as reported under absorption and variable costing?
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