Question

Absorption and Variable Costing Income Statements

During the first month of operations ended July 31, YoSan Inc. manufactured 9,800 flat panel televisions, of which 9,100 were sold. Operating data for the month are summarized as follows:

Sales		$1,456,000
Manufacturing costs:
Direct materials	$735,000
Direct labor	215,600
Variable manufacturing cost	186,200
Fixed manufacturing cost	98,000	1,234,800
Selling and administrative expenses:
Variable	$118,300
Fixed	54,400	172,700

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 operating income reported in (1) and (2).

The operating income reported under   costing exceeds the operating income reported under  costing, due to   manufacturing costs that are deferred to a future month under   costing.

Answer 1

Answer-1)-

YoSan Inc.
Contribution Margin statement (Using absorption costing approach)
Particulars			Amount
			$
Sales (a)			1456000
Less:- cost of goods sold (b)
Opening inventory
Add:- cost of goods manufatured		1136800
Direct materials		735000
Direct labor		215600
Variable factory overhead		186200
Fixed overhaed		98000
Cost of goods available for sale		1234800
Less:- Closing inventory	700 units*$126 per unit	88200	1146600
Gross contribution margin C= a-b			309400
Less:-Variable selling exp.			118300
Contribution margin			191100
Less:- Fixed costs
Selling & administrative exp.			54400
Net Income			136700

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

= ($735000+$215600+$186200+$98000)/9800 units

= $126 per unit

2)-

YoSan Inc.
Contribution Margin statement (Using variable costing approach)
Particulars			Amount
			$
Sales (a)			1456000
Less:- Variable cost of goods sold (b)
Opening inventory
Add:- Variable cost of goods manufatured		1136800
Direct materials		735000
Direct labor		215600
Variable factory overhead		186200
Variable cost of goods available for sale		1136800
Less:- Closing inventory	700 units*$116 per unit	81200	1055600
Gross contribution margin C= a-b			400400
Less:-Variable selling exp.			118300
Contribution margin			282100
Less:- Fixed costs
Manufacturing overhead			98000
Selling & administrative exp.			54400
Net Income			129700

Explanation-

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

= ($735000+$215600+$186200)/9800 units

= $116 per unit

3)- The operating income reported under   absorption costing exceeds the operating income reported under  variable costing, due to fixed  manufacturing costs that are deferred to a future month under variable costing.