Question

On January 1 of the current year, Townsend Co. commenced operations. It operated its plant at 100% of capacity during January. The following data summarized the results for January:

		Units
Production		50,000
Sales ($18 per unit)		42,000
Inventory, January 31		8,000
Manufacturing costs:
Variable		$575,000
Fixed		80,000
Total		$655,000
Selling and administrative expenses:
Variable		$35,000
Fixed		10,500
Total		$45,500

a. Prepare an income statement using absorption costing.

Townsend Co.
Absorption Costing Income Statement
For Month Ended January 31, 20--
		$
	$
		$
		$

b. Prepare an income statement using variable costing.

Townsend Co.
Variable Costing Income Statement
For Month Ended January 31, 20--
		$
	$
		$
		$
	$
		$

Answer 1

a. Absorption Costing Income Statement

Sales (42,000 x 18) (i)	756,000
Production costs:
Variable manufacturing overheads	575,000
Fixed manufacturing overheads	80,000
Cost of goods produced	655,000
- Closing stock of finished goods (655,000 x 8,000/50,000)	- 104,800
Cost of goods sold	550,200
+ Variable Selling and administrative overheads	35,000
+ Fixed Selling and administrative overheads	10,500
Total cost (ii)	595,700
Profit	$160,300

b. Variable Costing Income Statement

Sales (i)	756,000
Variable manufacturing overheads	575,000
- Closing stock of finished goods (575,000 x 8,000/50,000)	- 92,000
Cost of goods sold	483,000
+ Variable Selling and administrative overheads	35,000
Total variable cost (ii)	518,000
Contribution (i – ii)	238,000
- Fixed Selling and administrative overheads	- 10,500
- Fixed manufacturing overheads	- 80,000
Profit	$147,500