Cool Car Motors assembles and sells motor vehicles and uses standard costing. Actual data relating to April and May 2014 are as follows: The selling price per vehicle is $27000. The budgeted level of production used to calculate the budgeted fixed manufacturing cost per unit is 500 units. There are no price, efficiency, or spending variances. Any production-volume variance is written off to cost of goods sold in the month in which it occurs.
Requirements:
Prepare April and May 2014 income statements for Cool Car Motors under (a) variable costing and (b) absorption costing.
Prepare a numerical reconciliation and explanation of the difference between operating income for each month under variable costing and absorption costing.
Unit data April May
Beginning Inventory 0 100
Production 500 425
Sales 400 495
Variable Costs
Manufacturing cost/unit produced $11000 $11000
Operating (marketing) cost/unit sold 3200 3200
Fixed costs
Manufacturing costs $2000000 $2000000
Operating (marketing) costs 550000 550000

Cool Car Motors

Income statements for April and May - variable costing

                                                       April                               May

Sales ($27000)                       $10,800,000                $13,365,000

Less Cost of Sales                  ($4,400,000)               ($5,445,000)

Contribution                             $6,400,000                 $7,920,000

Less Expenses :

Fixed Manufacturing costs     ($2,000,000)               ($2,000,000)

Operating (marketing) costs :

Variable ($3200)                      ($1,280,000)               ($1,584,000)

Fixed                                           ($550,000)                 ($550,000)

Net Income / (Loss)                   $2,570,000                $3,786,000

Cool Car Motors

Income statements for April and May - Absorption costing

                                                       April                               May

Sales ($27000)                       $10,800,000                $13,365,000

Less Cost of Sales                  ($6,000,000)               ($7,425,000)

Gross Profit                              $4,800,000                 $5,940,000

Less Expenses :

Operating (marketing) costs :

Variable ($3200)                      ($1,280,000)               ($1,584,000)

Fixed                                           ($550,000)                 ($550,000)

Net Income / (Loss)                   $2,970,000                $3,806,000

Cool Car Motors

Reconciliation of Absorption Costing Profit to Variable Costing Profit

                                                                             April                      May

Absorption Costing Income                        $2,970,000                $3,806,000

Add Fixed Costs in Opening Inventory             $0                           $400,000

Less Fixed Cost in Closing Inventory          ($400,000)                  ($120,000)

Variable Costing Income                             $2,570,000                $3,786,000

Explanation : The Fixed Costs deferred in closing inventory is the cause of the difference between operating income for each month under variable costing and absorption costing.

Explanation:

Summary of Units

                                               April          May

Beginning Inventory                0              100

Add Production                      500           425

Available for Sale                   500           525

Less Sales                              (400)         (495)

Ending Inventory                     100             30

Variable Costing Calculations :

                                                                                April               May

Cost of Sales

Beginning Inventory at $11000                              $0           $1,100,000

Manufacturing Cost at $11000                       $5,500,000   $4,675,000

Ending Inventory at $11000                            ($1,100,000)   ($330,000)

Cost of Sales                                                   $4,400,000  $5,445,000

Absorption Costing Calculations :

                                                                               April                May

Cost of Sales

Beginning Inventory at $15000                              $0           $1,500,000

Manufacturing Cost at $15000                       $7,500,000   $6,375,000

Ending Inventory at $15000                            ($1,500,000)   ($450,000)

Cost of Sales                                                    $6,000,000    $7,425,000