After completing this chapter, you should be able to: Discuss the role of product and service costing in manufacturing and nonmanufacturing firms, diagram and explain the flow of costs through the manufacturing accounts used in product costing, distinguish between job-order costing and process costing,. | Lecture 27: Inventory costing and capacity analysis (continued) Income Comparison of Absorption and Variable Costing Let’s assume the following additional information for Harvey Company. 20,000 units were sold during the year at a price of $30 each. There were no units in beginning inventory. Now, let’s compute net operating income using both absorption and variable costing. 2 7-2 2 We need some additional information to allow us to prepare income statements for Harvey Company: 20,000 units were sold during the year. The selling price per unit is $30. There is no beginning inventory. Now let’s prepare income statements for Harvey Company. We will start with an absorption income statement. Absorption Costing 3 7-3 3 Harvey sold only 20,000 of the 25,000 units produced, leaving 5,000 units in ending inventory. At a sales price of $30 per unit, sales revenue for the 20,000 units sold is $600,000. At a unit product cost of $16, cost of goods sold for the 20,000 units sold is $320,000. Subtracting cost of goods sold from sales, we find the gross margin of $280,000. After subtracting selling and administrative expenses from the gross margin, we see that net operating income is $120,000. Variable manufacturing costs only. All fixed manufacturing overhead is expensed. Variable Costing 4 7-4 4 Now let’s examine a variable cost income statement. Notice that this is a contribution format statement. First, we subtract all variable expenses from sales to get contribution margin. At a product cost of $10 per unit, the variable cost of goods sold for 20,000 units is $200,000. The next variable expense is the variable selling and administrative expense. After computing contribution margin, we subtract fixed expenses to get the $90,000 net operating income. Note that all $150,000 of fixed manufacturing overhead is expensed in the current period. Comparing the Two Methods 5 7-5 5 Under absorption costing, $120,000 of fixed manufacturing overhead is included in cost of goods sold . | Lecture 27: Inventory costing and capacity analysis (continued) Income Comparison of Absorption and Variable Costing Let’s assume the following additional information for Harvey Company. 20,000 units were sold during the year at a price of $30 each. There were no units in beginning inventory. Now, let’s compute net operating income using both absorption and variable costing. 2 7-2 2 We need some additional information to allow us to prepare income statements for Harvey Company: 20,000 units were sold during the year. The selling price per unit is $30. There is no beginning inventory. Now let’s prepare income statements for Harvey Company. We will start with an absorption income statement. Absorption Costing 3 7-3 3 Harvey sold only 20,000 of the 25,000 units produced, leaving 5,000 units in ending inventory. At a sales price of $30 per unit, sales revenue for the 20,000 units sold is $600,000. At a unit product cost of $16, cost of goods sold for the 20,000 units sold is $320,000. .
