Question

Income Statements under Absorption Costing and Variable Costing

Joplin Industries Inc. manufactures and sells high-quality sporting goods equipment under its highly recognizable J-Sports logo. The company began operations on May 1 and operated at 100% of capacity (41,800 units) during the first month, creating an ending inventory of 3,800 units. During June, the company produced 38,000 garments during the month but sold 41,800 units at $95 per unit. The June manufacturing costs and selling and administrative expenses were as follows:

	Number of Units		Unit Cost		Total Cost
Manufacturing costs in June 1 beginning inventory:
Variable	3,800		$38.00		$144,400
Fixed	3,800		14.00		53,200
Total			$52.00		$197,600
Manufacturing costs in June:
Variable	38,000		$38.00		$1,444,000
Fixed	38,000		15.40		585,200
Total			$53.40		$2,029,200
Selling and administrative expenses in June:
Variable	41,800		18.20		$760,760
Fixed	41,800		7.00		292,600
Total			25.20		$1,053,360

a. Prepare an income statement according to the absorption costing concept for June.

Joplin Industries Inc.
Absorption Costing Income Statement
For the Month Ended June 30
Sales		$
Cost of goods sold:
Beginning inventory	$
Cost of goods manufactured
Total cost of goods sold
Gross profit		$
Selling and administrative expenses
Income from operations		$

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a. Under absorption costing, the cost of goods manufactured includes direct materials, direct labor, and factory overhead costs. Both fixed and variable factory costs are included as part of factory overhead.

Learning Objective 1.

b. Prepare an income statement according to the variable costing concept for June.

Joplin Industries Inc.
Variable Costing Income Statement
For the Month Ended June 30
Sales		$
Variable cost of goods sold
Manufacturing margin		$
Variable selling and administrative expenses
Contribution margin		$
Fixed costs:
Fixed manufacturing costs	$
Fixed selling and administrative expenses
Total fixed costs
Income from operations		$

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b. Under variable costing, the cost of goods manufactured includes only variable manufacturing costs.

b. Under variable costing, the cost of goods manufactured includes only variable manufacturing costs.

Learning Objective 1.

c. What is the reason for the difference in the amount of income from operations reported in (a) and (b)?

Under the absorption costing  method, the fixed manufacturing cost included in the cost of goods sold is matched with the revenues. Under variable costing , all of the fixed manufacturing cost is deducted in the period in which it is incurred, regardless of the amount of inventory change. Thus, when inventory decreases, the absorption costing  income statement will have a lower income from operations.

Answer 1

Income Statement A- Absorption Costing
Sales : (41800 UntX95)		$3,971,000.00
Less: Cost of Goods Sold
Beginning Inventory (3800X 52)	$197,600.00
Cost of Goods Manufactured (38000*53.40)	$2,029,200.00
Total Cost of Goods Available for Sale	$2,226,800.00
Cost of goods SOld		$2,226,800.00
Gross Profit		$1,744,200.00
Less: Operatng Expense
Variable S&A Expense	$760,760.00
Fixed Selling & Admin Expense	$292,600.00
Total operating Expense		$1,053,360.00
Operating ncome		$690,840.00
Income Statement As per Variable Costing
Sales : (41800 UntX95)		$3,971,000.00
Less: Variable Cost of Goods Sold
Beginning Inventory (3800X 38)	$144,400.00
Cost of Goods Manufactured (38000*38)	$1,444,000.00
Total Cost of Goods Available for Sale	$1,588,400.00
Cost of goods SOld		$1,588,400.00
Manufactureing Margin		$2,382,600.00
Less: Other Variable expense
Variable S&A Expense		$760,760.00
Contribution Margin		$1,621,840.00
Less: Fixed Expense
Fixed Manufacturing Overhead	$585,200.00
Fixed Selling & Admin Expense	$292,600.00
Total operating Expense		$877,800.00
Operating ncome		$744,040.00