Question

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

1	Sales (28,800 × $75)	$2,160,000.00
2	Manufacturing costs (28,800 units):
3	Direct materials	1,209,600.00
4	Direct labor	316,800.00
5	Variable factory overhead	172,800.00
6	Fixed factory overhead	241,920.00
7	Fixed selling and administrative expenses	29,200.00
8	Variable selling and administrative expenses	35,000.00

The company is evaluating a proposal to manufacture 36,000 units instead of 28,800 units, thus creating an ending inventory of 7,200 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.

Required:

a.

Prepare an estimated income statement, comparing operating results if 28,800 and 36,000 units are manufactured in (1) the absorption costing format and (2) the variable costing format. Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries. Be sure to complete the statement heading. A colon (:) will automatically appear if required. Round your unit cost to two decimal places and final answers to the nearest dollar amount. Enter all amounts as positive numbers.

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?

Answer 1

Answer:-a)-

Marshall Inc.
Contribution Margin statement (Using variable costing approach)
Particulars			Amount
			$
Sales (a)			2160000
Less:- Variable cost of goods sold (b)
Opening inventory		NIL
Add:- Variable cost of goods manufatured		1699200
Direct materials		1209600
Direct labor		316800
Variable manufacturing overhead		172800
Variable cost of goods available for sale		1699200
Less:- Closing inventory	7200 units*$47.20 per unit	339840	1359360
Gross contribution margin C= a-b			800640
Less:-Variable selling & administrative exp.			35000
Contribution margin			765640
Less:- Fixed costs
Manufacturing overhead			241920
Selling & administrative exp.			29200
Net Income			494520

Marshall Inc.
Contribution Margin statement (Using absorption costing approach)
Particulars			Amount
			$
Sales (a)			2160000
Less:- Variable cost of goods sold (b)
Opening inventory
Add:- Variable cost of goods manufactured		1699200
Direct materials		1209600
Direct labor		316800
Variable manufacturing overhead		172800
Fixed manufacturing overhead		241920
Variable cost of goods available for sale		1941120
Less:- Closing inventory	7200 units*$53.92 per unit	388224	1552896
Gross contribution margin C= a-b			607104
Less:-Variable selling & administrative exp.			35000
Contribution margin			572104
Less:- Fixed costs
Selling & administrative exp.			29200
Net Income			542904

b)-

Reconcilation between net operating income under variable & absorption costing method
Particulars		Amount
		$
Net income under variable costing method		494520
Less:-Fixed manufacturing overheads brought in (opening inventories)	Nil	0
Add:-Fixed manufacturing overheads carried forward in(closing inventories)	7200 units*$6.72 per unit	48384
Net income under absorption costing method		542904

Explanation:-

Unit fixed manufacturing overhead= fixed manufacturing overhead/No. of units produced

=$241920/36000 units =$6.72 per unit

Unit product cost under Absorption costing:-Direct materials + Direct Labor+ Variable manufacturing overhead + fixed manufacturing overhead

=($1209600+$316800+172800)/36000 units+$6.72

=$53.92 per unit

Unit product cost under Variable costing:-Direct materials + Direct Labor+ Variable manufacturing overhead

=($1209600+$316800+172800)/36000 units

=$47.20 per unit