Question

Absorption and Variable Costing Income Statements

During the first month of operations ended July 31, YoSan Inc. manufactured 9,000 flat panel televisions, of which 8,400 were sold. Operating data for the month are summarized as follows:

Sales		$1,302,000
Manufacturing costs:
Direct materials	$657,000
Direct labor	198,000
Variable manufacturing cost	171,000
Fixed manufacturing cost	81,000	1,107,000
Selling and administrative expenses:
Variable	$100,800
Fixed	46,400	147,200

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.

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Answer 1

1. Income statement based on the absorption costing concept is:

YoSan Inc.
Absorption Costing Income Statement
For the Month Ended July 31
Particulars	Units	rate	Amount ($)
Sales	8,400.00	155.00	1,302,000
Less: Cost of goods sold:
Beginning Inventory	0	0
Add: Production Cost this year
Direct Material	8,400.00	73.00	613,200
Direct Labour	8,400.00	22.00	184,800
Variable manufacturing overhead	8,400.00	19.00	159,600
Annual fixed manufacturing overhead	8,400.00	9.00	75,600
Gross Profit			268,800
Less: Selling and administrative expenses
Variable selling expenses			100,800
Fixed selling and administrative expense			46,400
Net operating Profit/loss			121,600

2. Income statement based on the variable costing concept is:

YoSan Inc.
Variable Costing Income Statement
For the Month Ended July 31
Particulars	Units	rate	Amount ($)
Sales	8,400.00	155.00	1,302,000
Production cost during the year:
Direct material	8,400.00	73	613,200
Direct labour	8,400.00	22	184,800
Overhead Costs:
Variable Overhead	8,400	19	159,600
Variable selling and administrative			100,800
Contribution margin			243,600
Fixed expenses:
Fixed manufacturing overhead			81,000
Fixed selling and administrative			46,400
Net operating Profit/loss			116,200

3. The income from operations reported under absorption costing exceeds the income from operations reported under variable costing by the difference of $5,400 between the two, due to fixed manufacturing costs that are deferred to a future month under absorption costing.

	Amount ($)
Net Income under absorption costing	121,600
Net income under variable costing	116,200
Difference	5,400
Difference is because of fixed manufacturing overhead	5,400
(6000*9)

Working Notes for unit costs:

Cost of goods sold:		Units	Per Unit Cost
Direct Material	657,000	9,000	73.00
Direct Labour	198,000	9,000	22.00
Variable manufacturing costs	171,000	9,000	19.00
Fixed manufacturing costs	81,000	9,000	9.00
Unit Product Cost	1,107,000		123.00