Absorption and income and variable-costing operating income

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Reference no: EM132295053

Chenango Can Company manufactures metal cans used in the food-processing industry. A case of cans sells for $30. The variable costs of production for one case of cans are as follows: Direct material $ 6.50 Direct labor 4.50 Variable manufacturing overhead 6.50 Total variable manufacturing cost per case $ 17.50

Variable selling and administrative costs amount to $.80 per case. Budgeted fixed manufacturing overhead is $498,000 per year, and fixed selling and administrative cost is $42,000 per year. The following data pertain to the company’s first three years of operation. (A unit refers to one case of cans.)

Year 1 Year 2 Year 3 Planned production (in units) 83,000 83,000 83,000 Finished-goods inventory (in units), January 1 0 0 24,500 Actual production (in units) 83,000 83,000 83,000 Sales (in units) 83,000 58,500 95,250 Finished-goods inventory (in units), December 31 0 24,500 12,250

Actual costs were the same as the budgeted costs. Required: 1. Prepare operating income statements for Chenango Can Company for its first three years of operations using: a. Absorption costing:

b. Variable costing:

2. Reconcile Chenango Can Company’s operating income reported under absorption and variable costing for each of its first three years of operation. Use the shortcut method.

3. Suppose that during Chenango's fourth year of operation actual production equals planned production, actual costs are equal to budgeted costs, and the company ends the year with no inventory on hand.

a. What will be the difference between absorption-costing operating income and variable-costing operating income in year 4?

b. What will be the relationship between total operating income for the four-year period as reported under absorption and variable costing?

Reference no: EM132295053

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