a.

Variable Costing

Zanzibar Company
Variable Costing Income Statement
For the Year Ended December 31, 2020
Revenues (345,400*$22) 7,598,800
Variable Cost of Goods Sold
Beginning Inventory (85,000 *5.10) 433,500
Variable Manufacturing Costs (345400+34500-85000*5.10) 1,503,990
Cost of Goods Available for Sale 1,937,490
Ending Inventory (34,500 *5.10) 175,950
Variable Cost of Goods Sold 1,761,540
Variable Operating Cost (345400*1.10) 379,940
Contribution Margin 5,457,320
Fixed Manufacturing Overhead 1,440,000
Fixed Operating Costs 1,080,000
Operating Income 2,937,320

Absorption Costing
FOH rate 240
Zanzibar Company FOT per un 4.8 2,694,920
Absortion Costing Income Statement
For the Year Ended December 31, 2020
Revenue 7,598,800
COGS:
Beginning Inventory 841,500
Variable Manufacturing Costs 1,503,990
Allocated Fixed Manufacturing Costs 1,415,520
Cost of Goods Available for Sale 3,761,010
Ending Inventory 341,550
Adjustment for production-volume variance 24,480
Cost of Goods Sold 3,443,940
Gross Margin 4,154,860
Variable Operating Costs 379,940
Fixed Operating Costs 1,080,000
Operating income 2,694,920
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2. What is Zanzibar’s operating income under each costing method (in percentage terms)?
Variable Costing 38.66% Variable costing income - Absorption Costing income =
Absotption Costing 35.47% 242,400
FM cost in beg inventory under absorption - FM in end inventory under
242,400
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3. Explain the difference in operating income between the two methods.
Operating income using variable costing is greater than operating income using absorption costing.
The main difference between variable costing and absorption costing is the way in which fixed
manufacturing costs are accounted for.
By reviewing the two percentages you calculated in the previous step, we can see that the operating
income using variable costing is higher than the operating income using absorption costing. The basis
of the difference between variable costing and absorption costing is how fixed manufacturing costs are
accounted for. Let's look at the beginning and ending inventory values that only contain the budgeted
fixed manufacturing cost portion:
Budgeted fixed manufacturing cost per unit x inventory units = Allocated fixed manufacturing costs
Beginning: 4.40 x 83. Difference in operating income under absorption versus variable costing $ 30,000
Ending: 4.40 x 31.000Under absorption costing:
The difference betweeFixed mfg. costs in ending inventory (500 units  $60 per unit) $ 30,000
$136,400 = $228,800)Fixed mfg. costs in beginning inventory (0 units  $60 per unit) 0
and absorption, respeChange in fixed mfg. costs between ending and beginning inventory
 Variable Manufacturing 5.10
Fixed Manufacturing Cost per unit (1440000/ (6000*50)) 4.80
9.90

PVV = 144000 (Budgeted) 0-1415520 (allocated)

6000 hours x 50 -294900 x 4.8
24480

ng income =

n - FM in end inventory under absorption

3. 2017 operating income under absorption costing is greater than the operating income under variable costing bec
by 500 units. As a result, under absorption costing, a portion of the fixed overhead remained in the ending inventor
goods sold (relative to variable costing). As shown below, the difference in the two operating incomes is exactly the
fixed manufacturing costs included in ending versus beginning inventory (under absorption costing).
Operating income under absorption costing $1,573,150
Operating income under variable costing 1,543,150
 me under variable costing because in 2017 inventory increased
mained in the ending inventory and led to a lower cost of
perating incomes is exactly the same as the difference in the
rption costing).