Question

Sims Company, a manufacturer of tablet computers, began operations on January 1, 2017. Its cost and sales information for this year follows. Manufacturing costs Direct materials $ 40 per unit Direct labor $ 60 per unit Overhead costs for the year Variable overhead $ 4,400,000 Fixed overhead $ 6,600,000 Selling and administrative costs for the year Variable $ 750,000 Fixed $ 4,250,000 Production and sales for the year Units produced 110,000 units Units sold 80,000 units Sales price per unit $ 350 per unit

1. Prepare an income statement for the year using variable costing. 2. Prepare an income statement for the year using absorption costing. 3. Under what circumstance(s) is reported income identical under both absorption costing and variable costing?

Answer 1

SOLUTION

1. Income statement for the year using variable costing

Particulars	Amount ($)	Amount ($)
Sales (80,000*$350)		28,000,000
Less: Variable costs
Direct material (80,000*$40)	3,200,000
Direct labor (80,000*$60)	4,800,000
Variable overhead costs (4,400,000/110,000*80,000)	3,200,000
Variable selling and administrative expenses	750,000
Total variable cost		11,950,000
Contribution margin		16,050,000
Less: Fixed expenses
Fixed selling and administrative expenses	4,250,000
Fixed overhead costs	6,600,000
Total fixed expenses		10,850,000
Net income / (loss)		5,200,000

2. Income statement for the year using absorption costing

Particulars	Amount ($)	Amount ($)
Sales (80,000*$350)		28,000,000
Less: Cost of goods sold
Direct material (80,000*$40)	3,200,000
Direct labor (80,000*$60)	4,800,000
Variable overhead costs (4,400,000/110,000*80,000)	3,200,000
Fixed overhead costs (6,600,000/110,000*80,000)	4,800,000
Cost of goods sold		16,000,000
Gross margin		12,000,000
Selling and administrative expenses:
Fixed selling and administrative expenses	4,250,000
Variable selling and administrative expenses	750,000
Total selling and administrative expenses		5,000,000
Net income / (Loss)		7,000,000

3. If production equals to sales and there is opening and closing inventory.