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Kenzi Kayaking, a manufacturer of kayaks, began operations this year. During this first year, the company produced 1,050 kayaks and sold 800 at a price of 1,050each.Atthisfirstyearend,thecompanyreportedthefollowingincomestatementinformationusingabsorptioncosting.1,050 each. At this first year-end, the company reported the following income statement information using absorption costing.

Sales (800 x $1,050)$840,000Cost of goods sold (800 x $500)400,000Gross margin440,000Selling and administrative expenses230,000Net income$210,000\begin{matrix} \text{Sales (800 x \$1,050)}\ldots\ldots\ldots & \text{\$840,000}\\ \text{Cost of goods sold (800 x \$500)}\ldots\ldots\ldots & \text{400,000}\\ \text{Gross margin}\ldots\ldots\ldots & \text{440,000}\\ \text{Selling and administrative expenses}\ldots\ldots\ldots & \text{230,000}\\ \text{Net income}\ldots\ldots\ldots & \text{\$210,000}\\ \end{matrix}

$a. Product cost per kayak totals$500, which consists of $400 in variable production cost and$100 in fixed production cost—the latter amount is based on $105,000 of fixed production costs allocated to the 1,050 kayaks produced. b. The$230,000 in selling and administrative expense consists of $75,000 that is variable and$155,000 that is fixed. 1. Prepare an income statement for the current year under variable costing. 2. Explain the difference in income between the variable costing and absorption costing income statement

Question

Kenzi Kayaking, a manufacturer of kayaks, began operations this year. During this first year, the company produced 1,050 kayaks and sold 800 at a price or $1,050 each. At this first year-end. the company reported the following income statement information using absorption costing.

Sales (800 x $1,050)$840,000Cost of goods sold (800 x $500)400,000Gross margin440,000Selling and administrative expenses230,000Net income$210,000\begin{array}{lr} \text{Sales (800 x \$1,050)}&\text{\$840,000}\\ \text{Cost of goods sold (800 x \$500)}&\underline{\text{\hspace{5pt}400,000}}\\ \text{Gross margin}&\text{440,000}\\ \text{Selling and administrative expenses}&\underline{\text{\hspace{5pt}230,000}}\\ \text{Net income}&\underline{\underline{\text{\$210,000}}}\\ \end{array}

Additional Information

a. Product cost per kayak totals $500, which consists of$400 in variable production cost and $100 in fixed production cost-the latter amount is based on$105,000 of fixed production costs allocated to the 1,050 kayaks produced.

b. The $230,000 in selling and administrative expenses consists of$75,000 that is variable and $155,000 that is fixed.

Required

  1. Prepare an income statement for the current year under variable costing.

  2. Fill in the blanks: The dollar difference in variable costing income and absorption costing Income = ____ units x _____ fixed overhead per unit.

Solution

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In this problem, we will discuss the concept of variable and absorption costing.

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