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Absorption and Variable Costing Assignment
Clean Michigan Inc. produces an environmentally friendly cleaning material which it sells
wholesale at a price of $60 per case. The firm uses normal volume of 4,000 cases as the
denominator for allocating fixed manufacturing overhead to the product. Costs and production
and sales volumes for the first two years of the firm’s operation are presented below. Assume
that there are no variances except the production volume variance for fixed manufacturing
overhead (as under standard costing), and that this variance is closed to cost of goods sold at the
end of the year. Also, assume FIFO inventory accounting.
Sales (in cases)
Production (in cases)
Variable manufacturing costs
Fixed manufacturing overhead
Selling and administrative costs:
1. Create absorption-costing and variable-costing income statements for Year 1 and Year 2.
Exhibit 9-2 in the textbook provides a useful model.
2. Prepare a reconciliation of the difference between absorption-costing and variable-costing
income in the two years, like the spreadsheet excerpt at the top of p. 336 in the textbook
(formula 2) and/or in the center of p. 335 (formula 1).
3. The sum of AC income for the two years will not equal the sum of VC income for the 2 years
in this example. The sum of the AC income for the two years will be higher. Why is this the
case? Explain in a sentence or two.
Requirements 1 and 2 should be on separate tabs in Excel, and requirement 3 should be a text
box near the reconciliation you did for requirement 2.
The excerpt states:
FMOH allocated to produced units – FMOH in COGS = Difference between absorption and variable
The second excerpt states:
FMOH in ending – FMOH in beginning FG = Difference between absorption and variable costing income