Game Time
manufactures video games that it sells for
$37
each. The company uses a fixed manufacturing overhead allocation rate of
$5
per game. Assume all costs and production levels are exactly as planned. The following data are from
Game Time's
first two months in business during
2018:
Data Table - X 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 Total product cost per game Requirement 2a. Prepare monthly income statements for October and November, including columns for each month and a total column, using absorption costing. Sales October 1,800 units 2,400 units 15 $ November 2,600 units 2,400 units Game Time Absorption Costing Income Statement October 2018 November 2018 $ 15 Total Production Variable manufacturing cost per game Sales commission cost per game Total fixed manufacturing overhead Total fixed selling and administrative costs 6 6 12,000 9,000 12,000 9,000 Print Done Operating Income Requirement 2b. Prepare monthly income statements for October and November, including columns for each month and a total column, using variable costing. Game Time Variable Costing Income Statement October 2018 November 2018 Total 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 Print Done of fixed manufacturing overhead that is contained in the units in ending inventory under As inventory as was the case in November, October's costs that absorption costing assigned to that inventory are expensed in This November's 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 Absorption Variable costing costing November 30, 2018 Absorption Variable costing costing Finished Goods Inventory The higher inventory balance under is representative of the Under absorption costing, the difference in the product cost per game is whereas under variable costing, the difference in the product cost per game is 7
