Game Store manufactures video games that it sells for $38 each. The company uses a fixed manufacturing overhead allocation rate of $3 per game. Assume all costs and production levels are exactly as planned. The following data are from Game Store's first two months in business during 2018: (Click the icon to view the data.) Read the requirements. Requirement 1. Compute the product cost per game produced under absorption costing and under variable costing. October 2018 November 2018 Absorption Variable Absorption Variable costing costing costing costing 16 Total product cost per game 19 19 16 Requirement 2a. Prepare monthly income statements for October and November, including columns for each month and a total column, using absorption costing. HINT: Begin with net sales revenue, and note that there is a subtotal to be calculated as you work toward operating income. Remember that an absorption costing income statement looks like a "traditional income statement. Game Store Absorption Costing Income Statement October 2018 November 2018 Total Net Sales Revenue Cost of Goods Sold Gross Profit Fixed Costs Operating Income Requirement 2b. Prepare monthly income statements for October and November, including columns for each month and a total column, using variable costing. HINT: Begin with net sales revenue, and note that there is a subtotal to be calculated as you work toward operating income. Remember that a variable costing income statement does not follow the "traditional" income statement format. Game Store Variable Costing Income Statement October 2018 November 2018 Total Net Sales Revenue Selling and Administrative Costs Contribution Margin Operating Income Requirement 3. Is operating income higher under absorption costing or variable costing in October? In November? Explain the pattern of differences in operating income based on absorption costing versus variable costing In October, the operating income is higher under costing. The primary reason for this is that are distributed across the entire production of fixed manufacturing overhead costs are run as part of the unit cost. Under the absorption costing method, In November, the operating income is higher under costing. The primary reason for this is because of fixed manufacturing overhead that is contained in the units in ending inventory under As inventory as was the case in November, October's This November's costs that absorption costing assigned to that inventory are expensed in absorption costing income. Requirement 4. Determine the balance in Finished Goods Inventory on October 31 and November 30 under absorption costing and variable costing. Compare the differences in inventory balances and the differences in operating income. Explain the differences in inventory balances based on absorption costing versus variable costing. October 31, 2018 November 30, 2018 Variable Variable Absorption costing Absorption costing costing costing Finished Goods Inventory Under absorption costing, the difference in the product cost per game is The higher inventory balance under absorption costing is representative of the whereas under variable costing, the difference in the product cost per game is i - X Data Table October Sales 1,500 units 2,800 units November 2,900 units 2,800 units $ 16 $ 16 Production Variable manufacturing cost per game Sales commission cost per game Total fixed manufacturing overhead Total fixed selling and administrative costs 8 8 8,400 8,400 8,000 8,000 Print Done i Requirements a. 1. Compute the product cost per game produced under absorption costing and under variable costing. 2. Prepare monthly income statements for October and November, including columns for each month and a total column, using these costing methods: absorption costing. b. variable costing. 3. Is operating income higher under absorption costing or variable costing in October? In November? Explain the pattern of differences in operating income based on absorption costing versus variable costing. 4. Determine the balance in Finished Goods Inventory on October 31 and November 30 under absorption costing and variable costing. Compare the differences in inventory balances and the differences in operating income. Explain the differences in inventory balances based on absorption costing versus variable costing
