Estimated Income Statements using Absorption and Variable Co

Estimated Income Statements, using Absorption and Variable Costing

Prior to the first month of operations ending October 31 Marshall Inc. estimated the following operating results:

The company is evaluating a proposal to manufacture 22,400 units instead of 20,000 units, thus creating an Inventory, October 31 of 2,400 units. Manufacturing the additional units will not change sales, unit variable factory overhead costs, total fixed factory overhead cost, or total selling and administrative expenses.

a. 1. Prepare an estimated income statement, comparing operating results if 20,000 and 22,400 units are manufactured in the absorption costing format. If an amount box does not require an entry leave it blank or enter “0”.

a. 2. Prepare an estimated income statement, comparing operating results if 20,000 and 22,400 units are manufactured in the variable costing format. If an amount box does not require an entry leave it blank or enter “0”.

b. What is the reason for the difference in income from operations reported for the two levels of production by the absorption costing income statement?

The increase in income from operations under absorption costing is caused by the allocation of ___ overhead cost over a number ____ of units. Thus, the cost of goods sold is ____. The difference can also be explained by the amount of ____ overhead cost included in the ______ inventory.

Sales (20,000 x $71)	$1,420,000
Manufacturing costs (20,000 units):
Direct materials	852,000
Direct labor	202,000
Variable factory overhead	94,000
Fixed factory overhead	112,000
Fixed selling and administrative expenses	30,500
Variable selling and administrative expenses	36,800

Solution

Answer a-1. Calculation of Cost per Unit Under Absorption Costing 20,000 Units Manufactured 22,400 Units Manufactured Direct Material                                   42.60                                    42.60 Direct Labor                                   10.10                                    10.10 Variable Factory Overhead                                     4.70                                       4.70 Fixed Factory Overhead                                     5.60                                       5.00 Total Cost per Unit                                   63.00                                    62.40 Fixed Factory Overhead per Unit: 20,000 Units Manufactured = $112,000 / 20,000 Units = $5.60 per Unit 22,400 Units Manufactured = $112,000 / 22,400 Units = $5 per Unit Note: Selling and administrative expenses (both variable and fixed) are not relevant for the computation of unit product cost in both absorption costing & variable costing. Marshall Inc. Absorption Costing Income Statement For the Month Ending October 31 20,000 Units Manufactured 22,400 Units Manufactured Sales                    1,420,000.00                      1,420,000.00 (20,000 Nos X $71) (20,000 Nos X $71) Cost of Goods Sold: Cost of Goods Manufactured                    1,260,000.00                      1,397,760.00 (20,000 Nos X $63) (22,400 Nos X $62.40) Less: Inventory, October 31                                          -                            149,760.00 (2,400 Nos X $62.40) Total Cost of Goods Sold                    1,260,000.00                      1,248,000.00 Gross Profit                        160,000.00                          172,000.00 Selling & Administrative Expenses Fixed Selling & Administrative Expenses                          30,500.00                            30,500.00 Variable Selling & Administrative Expenses                          36,800.00                            36,800.00 Total Selling & Administrative Expenses                          67,300.00                            67,300.00 Income From Operations                          92,700.00                          104,700.00 Answer a-2. Calculation of Cost per Unit Under Variable Costing 20,000 Units Manufactured 22,400 Units Manufactured Direct Material                                   42.60                                    42.60 Direct Labor                                   10.10                                    10.10 Variable Factory Overhead                                     4.70                                       4.70 Total Cost per Unit                                   57.40                                    57.40 Marshall Inc. Variable Costing Income Statement For the Month Ending October 31 20,000 Units Manufactured 22,400 Units Manufactured Sales                    1,420,000.00                      1,420,000.00 (20,000 Nos X $71) (20,000 Nos X $71) Cost of Goods Sold: Cost of Goods Manufactured                    1,148,000.00                      1,285,760.00 (20,000 Nos X $57.40) (22,400 Nos X $57.40) Less: Inventory, October 31                                          -                            137,760.00 (2,400 Nos X $57.40) Total Cost of Goods Sold                    1,148,000.00                      1,148,000.00 Manufacturing Margin                        272,000.00                          272,000.00 Variable Selling & Administrative Expenses                          36,800.00                            36,800.00 Contribution Margin                        235,200.00                          235,200.00 Fixed Costs: Fixed Factory Overhead                        112,000.00                          112,000.00 Fixed Selling & Administrative Expenses                          30,500.00                            30,500.00 Total Fixed Costs                        142,500.00                          142,500.00 Income From Operations                        129,500.00                          129,500.00 Answer b. The increase in income from operations under absorption costing is caused by the allocation of Fixed overhead cost over a number 22,400 of units. Thus, the cost of goods sold is $1,248,000. The difference can also be explained by the amount of Fixed overhead cost included in the Ending inventory.