Question - Absorption and Variable Costing Comparisons
Peachtree Company manufactures peach jam. Because of bad weather, its peach crop was small. The following data have been gathered for the summer quarter of 2012:
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Beginning inventory (cases)
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0
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Cases produced
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10,000
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Cases sold
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9,400
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Sales price per case
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$ 60
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Direct materials per case
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$ 8
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Direct labor per case
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$ 9
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Variable manufacturing overhead per case
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$ 3
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Total fixed manufacturing overhead
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$ 400,000
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Variable selling and administrative cost per case
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$ 2
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Fixed selling and administrative cost
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$ 48,000
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(a) Prepare a functional income statement for the quarter using absorption costing.
(b) Prepare a contribution income statement for the quarter using variable costing.
(c) What is the value of ending inventory under absorption costing?
(d) What is the value of ending inventory under variable costing?
(e) The difference in the value of ending inventory in parts (c) and (d) is explained by the following difference between absorption and variable costing:
Variable costing assigns only variable manufacturing costs to products while absorption costing assigns both variable and fixed manufacturing costs to products. Variable costing treats all manufacturing costs as variable costs while absorption costing treats only variable manufacturing costs as variable costs. Absorption costing treats fixed costs as period costs while variable costing treats fixed costs as product costs. Absorption costing treats all manufacturing costs as period costs while variable costing treats only variable manufacturing costs as period costs.