Problem 8-38 Variable Costing and Absorption Costing Income Statements; Reconciling Reported Operating Income (LO 8-2, 8-3, 8-4) Chataqua Can Company manufactures metal cans used in the food-processing industry. A case of cans sells for $30. The variable costs of production for one case of cans are as follows: Direct material Direct labor Variable manufacturing overhead Total variable manufacturing cost per case $ 8.00 2.50 7.50 $18.00 Variable selling and administrative costs amount to $0.40 per case. Budgeted fixed manufacturing overhead is $455,000 per year, and fixed selling and administrative cost is $46,000 per year. The following data pertain to the company's first three years of operation. Planned production (in units) Finished-goods inventory (in units), January 1 Actual production (in units) Sales (in units) Finished-goods inventory (in units), December 31 Year 1 91,000 0 91,000 91,000 0 Year 2 91,000 0 91,000 62,500 28,500 Year 3 91,000 28,500 91,000 105, 250 14,250 Actual costs were the same as the budgeted costs. Required: 1. Prepare operating income statements for Chataqua Can Company for its first three years of operations using: a. Absorption costing. b. Variable costing. 2. Reconcile Chataqua Can Company's operating income reported under absorption and variable costing for each of its first three years of operation. Use the shortcut method. 3. Suppose that during Chataqua's 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. a. What will be the difference between absorption-costing income and variable-costing income in year 4? b. What will be the relationship between total operating income for the four-year period as reported under absorption and variable costing? Complete this question by entering your answers in the tabs below. Req 1A Reg 1B Reg 2 Req Reg 3B Prepare operating income statements for Chataqua Can Company for its first three years of operations using variable costing. Year 1 Year 2 Year 3 $ 2,730,000 $ 1,875,000 $ 3,157,500 Sales revenue Variable expenses: Variable manufacturing costs Variable selling and administrative 0 0 1,875,000 Contribution margin $ 2,730,000 $ $ 3,157,500 Fixed expenses: 0 0 0 46,000 46,000 Fixed selling and administrative Fixed manufacturing overhead Operating income 46,000 455,000 455,000 455,000 1,374,000 $ 2,656,500 $ 2,229,000 $ Complete this question by entering your answers in the tabs below. Req 1A Req 1B Reg 2 Req 3A Req 3B Reconcile Chataqua Can Company's operating income reported under absorption and variable costing for each of its first three years of operation. Use the shortcut method. Year Change in inventory (in units) Predetermined fixed overhead rate Difference in fixed overhead expensed under absorption and variable costing 1 0 2 3 554,600
