Question

Sims Company, a manufacturer of tablet computers, began operations on January 1, 2019. Its cost and sales information for this year follows.

Manufacturing costs
Direct materials	$	35	per unit
Direct labor	$	55	per unit
Overhead costs
Variable	$	40	per unit
Fixed	$	6,300,000	(per year)
Selling and administrative costs for the year
Variable	$	750,000
Fixed	$	5,000,000
Production and sales for the year
Units produced		105,000	units
Units sold		75,000	units
Sales price per unit	$	360	per unit

1. Prepare an income statement for the year using variable costing.
2. Prepare an income statement for the year using absorption costing.

Prepare an income statement for the year using variable costing.

	SIMS COMPANY Variable Costing Income Statement Sales Less: Variable costs Direct materials Direct labor Variable overhead costs Variable selling and administrative expenses Total variable costs Contribution margin Less: Fixed expenses Fixed overhead costs Fixed selling and administrative costs Fixed overhead costs Net income (loss)

Prepare an income statement for the year using absorption costing.

	SIMS COMPANY Absorption Costing Income Statement Net income (loss)

Answer 1

1.

SIMS COMPANY
Variable costing Income Statement
Sales (75,000 x 360)		$27,000,000
Less: Variable Costs:
Direct materials (75,000 x 35)	2,625,000
Direct labor (75,000 x 55)	4,125,000
Variable overhead costs (75,000 x 40)	3,000,000
Variable selling and administrative expenses	750,000
Total Variable costs		-10,500,000
Contribution Margin		$16,500,000
Less: Fixed expense:
Fixed overhead costs	6,300,000
Fixed selling and administrative expenses	5,000,000
Total fixed expenses		-11,300,000
Net Income		$5,200,000

2.

SIMS COMPANY
Absorption Costing Income Statement
Sales (75,000 x 360)		$27,000,000
Cost of goods sold:
Direct materials (105,000 x 35)	3,675,000
Direct labor (105,000 x 55)	5,775,000
Variable overhead costs (105,000 x 40)	4,200,000
Fixed overhead costs	6,300,000
Cost of goods manufactured	19,950,000
Less: Ending inventory (19,950,000 x 30,000/105,000)	-5,700,000
Cost of goods sold		-14,250,000
Gross profit		$12,750,000
Operating expenses:
Variable selling and administrative expenses	750,000
Fixed selling and administrative expenses	5,000,000
Total operating expense		-5,750,000
Net Income		$7,000,000