Problem
Variable and absorption costing; explaining operating income differences. [Excel template] TC Motors assembles and sells motor vehicles, and uses standard costing. Actual data relating to April and May are
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April
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May
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Unit data
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Beginning inventory
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0
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150
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Production
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500
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400
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Sales
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350
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520
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Variable costs
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Manufacturing cost per unit produced
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$ 10,000
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$ 10,000
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Operating, marketing, cost per unit sold
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$ 3,000
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$ 3,000
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Fixed costs
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Manufacturing costs
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$2,000,000
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$2,000,000
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Operating, marketing, costs
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$ 600,000
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$ 600,000
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The selling price per vehicle is $26,000. The budgeted level of production used to calculate the budgeted fixed manufacturing cost per unit is 500 units. There are no price, efficiency, or rate variances. Any production-volume variance is written off to COGS in the month in which it occurs.
Task
A. Prepare April and May statements of comprehensive income for TC Motors under (i) variable costing and (ii) absorption costing.
B. Prepare a numerical reconciliation and explanation of the difference between operating income for each month under variable costing and absorption costing.