Question

Absorption and Variable Costing Income Statements

During the first month of operations ended July 31, YoSan Inc. manufactured 10,400 flat panel televisions, of which 9,800 were sold. Operating data for the month are summarized as follows:

Sales		$1,715,000
Manufacturing costs:
Direct materials	$852,800
Direct labor	260,000
Variable manufacturing cost	218,400
Fixed manufacturing cost	114,400	1,445,600
Selling and administrative expenses:
Variable	$137,200
Fixed	63,100	200,300

Required:

1. Prepare an income statement based on the absorption costing concept.

YoSan Inc.
Absorption Costing Income Statement
For the Month Ended July 31
		$
Cost of goods sold:
	$
		$
		$

2. Prepare an income statement based on the variable costing concept.

YoSan Inc.
Variable Costing Income Statement
For the Month Ended July 31
		$
Variable cost of goods sold:
	$
		$
		$
Fixed costs:
	$
		$

3. Explain the reason for the difference in the amount of income from operations reported in (1) and (2).

The income from operations reported under costing exceeds the income from operations reported under costing by the difference between the two, due to manufacturing costs that are deferred to a future month under costing.

Check My Work

Answer 1

Absorption Costing income statement
Sales						1,715,000
cost of goods sold
cost of goods manufactured					1,445,600
less:Ending inventory		(1445600/10400)*600			83400
cost of goods sold						1,362,200
Gross profit						352,800
less:Selling & administrative expense						200,300
Net operating income						152,500
Variable costing income statement
Sales						1,715,000
Variable cost of goods sold
Variable cost of goods manufactured					1331200
less:Ending inventory (1331200/10400)*600					76800
Variable cost of goods sold						1254400
manufacturing margin						460,600
less:Variable and selling administrative expense						137,200
Contribution margin						323,400
Fixed costs:
Fixed manufacturing cost					114,400
Fixed selling & administrative cost					63,100
total fixed expense						177,500
Net operating income						145,900
the income from operations reported under absorption costing exceeds the income from operations reported
under variable costing by the difference between the two due to fixed manufacturing costs that are deferred
to a future month under absorption costing.