The selling price per unit is $3,500. The budgeted level of production used to calculate the budgeted fixed manufacturing cost per unit is 1,400 units. There are no price, efficiency, or spending variances. Any pro- duction-volume variance is written off to cost of goods sold in the month in which it occurs. 360 CHAPTER 9 INVENTORY COSTING AND CAPACITY ANALYSIS 1. Prepare income statements for Crystal Clear in January, February, and March 2014 under (a) variable costing and (b) absorption costing. 2. Explain the difference in operating income for January, February, and March under variable costing and absorption costing.

Question Completion:

Crystal Clear Corporation manufactures and sells 50-inch television sets and uses standard costing. Actual data relating to January, February, and March 2014 are as follows:

Unit data                         January    February       March  

Beginning inventory                0                100           100

Production                                1,400     1,375        1,430

Sales                                 1,300     1,375        1,455

Variable Costs    

Manufacturing cost

per unit produced           950           950          950

Operating (marketing)

cost per unit sold                  725              725          725

Fixed Costs    

Manufacturing costs             490,000      490,000      490,000

Operating (marketing) costs   120,00       120,000       120,000

Crystal Clear

1. Income Statements in January, February, and March 2014:

a. Variable Costing Income Statement

                             January               February                  March

Sales Revenue            $4,550,000           $4,812,500         $5,092,500

Variable cost of goods   2,177,500             2,303,125             2,437,125

Contribution margin   $2,372,500          $2,509,375         $2,655,375

Fixed Costs    

Manufacturing costs       490,000               490,000               490,000

Operating (marketing)     120,000                120,000               120,000

Total fixed costs            $610,000              $610,000             $610,000

Net operating income $2,371,800          $1,899,375          $2,045,375

b. Absorption Costing Income Statement

                             January               February                  March

Sales Revenue            $4,550,000           $4,812,500         $5,092,500

Cost of goods sold        1,690,000              1,795,750               1,881,315

Gross profit                 $2,860,000           $3,016,750            $3,211,185

Total operating costs    1,062,500               1,116,875               1,174,875

Net operating income $1,797,500           $1,899,875           $2,036,310

2. The difference in the operating incomes for January, February, and March under variable costing and absorption costing is due to the way the fixed cost per month is accounted for in cost of goods sold and ending inventory.  With variable costing, all variable costs are included, while absorption includes both variable and fixed manufacturing costs. This makes the ending inventory of variable costing to be carried forward to the next period while absorption costing includes every fixed cost as period costs.

Explanation:

a) Data and Calculations:

Unit data                         January    February       March  

Beginning inventory                0                100           100

Production                                1,400     1,375        1,430

Sales                                 1,300     1,375        1,455

Ending inventory                             100               100               75

Variable Costs    

Manufacturing cost

per unit produced           950           950          950

Operating (marketing)

cost per unit sold                  725              725          725

Fixed Costs    

Manufacturing costs             490,000      490,000      490,000

Operating (marketing) costs   120,00       120,000       120,000

Cost of production:

Variable Costs    

Manufacturing cost

per unit produced         $1,330,000         $1,306,250            $1,358,500

                                    (1,400 * $950)     (1,375 * $950)         (1,430 * $950)  

Fixed Costs    

Manufacturing costs         490,000              490,000                490,000

Total production costs $1,820,000          $1,796,250           $1,848,500

Production units                     1,400                    1,375                     1,430

Unit cost of production       $1,300                  $1,306                  $1,293

Sales Units                             1,300                    1,375                     1,455

Cost of goods sold     $1,690,000           $1,795,750             $1,881,315

Operating (marketing)  (1,300*$725)      (1,375*$725)   (1,455*$725)

cost per unit sold          

Variable operating cost        $942,500     $996,875    $1,054,875

Fixed Costs    

Operating (marketing) costs   120,000       120,000         120,000

Total operating costs         $1,062,500    $1,116,875     $1,174,875

Variable Costs    

Manufacturing cost

per unit produced           950           950          950

Operating (marketing)

cost per unit sold                  725              725          725

Total per unit variable cost       $1,675         $1,675          $1,675

Sales Units                                  1,300            1,375             1,455

Total variable cost of goods

sold =                                 $2,177,500   $2,303,125  $2,437,125

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