Question

Vinson Co. manufactures and sells one product.  Assume the selling price for each item is $200/per unit.  The following information pertains to the company’s first two years of operation:

Variable Costs Per Unit:

Manufacturing:

                  Direct Materials                                                                        $32/unit

                  Direct Labor                                                              $20/unit

                  Variable Manufacturing Overhead               $4/unit

Variable Selling and Administrative                              $3/unit

Fixed Costs:

Fixed Manufacturing Overhead                                       $660,000

Fixed Selling and Administrative                                    $120,000

Additionally, Vinson Company provides you with the following inventory flow information in terms of units for YEAR 1 & YEAR 2:

                                                                                                            YEAR 1                     YEAR 2                     

Beginning Inventory (units)                                               0                                 20,000                    

Units Produced                                                                         100,000                 75,000                    

Units Sold                                                                                     80,000                    90,000                    

Ending Inventory (units)                                                                        20,000                    5,000

-Prepare the Company’s YEAR 1 & 2 Traditional Income Statement---properly label and show all amounts

-Do the Contribution Margin and Traditional Income Statements provide differing Net Income amounts.  If so, what are they and explain in detail using NUMBERS FROM YOUR ANALYSIS ABOVE why they are different.

Answer 1

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Ans 1
Contribution Margin statement	Year 1	Year 2
Sell Price	200.00	200.00	A
Direct Materials	32.00	32.00	B
Direct Labor	20.00	20.00	C
Variable manufacturing overhead	4.00	4.00	D
Variable selling and admin	3.00	3.00	E
Total Variable cost	59.00	59.00	F=B+C+D+E
Contribution per unit	141.00	141.00	G=A-F
Number of units sold	80,000.00	90,000.00	H
Contribution amount	11,280,000.00	12,690,000.00	I=G*H
Fixed manufacturing overhead	660,000.00	660,000.00	J
Fixed selling and admin	120,000.00	120,000.00	K
Net Income	10,500,000.00	11,910,000.00	L=I-J-K
Absorption costing statement	Year 1	Year 2
Opening Stock	-	20,000.00	M
Add: Production	100,000.00	75,000.00	N
Less: Sales	80,000.00	90,000.00	O
Closing Stock	20,000.00	5,000.00	P=M+N-O
Direct Materials	3,200,000.00	2,400,000.00	Q=N*B
Direct Labor	2,000,000.00	1,500,000.00	R=N*C
Variable manufacturing overhead	400,000.00	300,000.00	S=N*D
Fixed manufacturing overhead	660,000.00	660,000.00	J
Cost of production	6,260,000.00	4,860,000.00	T=J+Q+R+S
Add: Opening Stock	-	1,252,000.00	Closing stock of previous Year
Less: Closing stock	1,252,000.00	324,000.00	U=T/N*P
Cost of goods sold	5,008,000.00	5,788,000.00
Variable selling and admin	240,000.00	270,000.00	V=O*E
Fixed selling and admin	120,000.00	120,000.00	K
Cost of goods sales	5,368,000.00	6,178,000.00
Sales	16,000,000.00	18,000,000.00
Net Income	10,632,000.00	11,822,000.00	W
Difference in Net Income Absorption v/s Contribution	132,000.00	(88,000.00)	X= W-L
The difference between the variable costing and absorption costing net income is due to Fixed manufacturing overhead portion in closing stock. I am showing the reconciliation below:
Reconciliation of Net Income Absorption v/s Contribution:	Year 1	Year 2
Fixed manufacturing overhead	660,000.00	660,000.00	J
Production units	100,000.00	75,000.00	N
Fixed manufacturing overhead per unit	6.60	8.80	Y=J/N
Closing Stock	20,000.00	5,000.00	P
Fixed manufacturing overhead in Opening stock	-	132,000.00	Closing stock of previous Year
Fixed manufacturing overhead in closing stock	132,000.00	44,000.00	Z=P*Y
Net Income as per Contribution Margin statement	10,500,000.00	11,910,000.00	L
Net Income as per Absorption costing statement	10,632,000.00	11,822,000.00	AA=Z+L	Hence reconciled.