Question

Jackson Company produces plastic that is used for injection-molding applications such as gears for small motors. In 2016, the first year of operations, Jackson produced 4,100 tons of plastic and sold 3,075 tons. In 2017, the production and sales results were exactly reversed. In each year, the selling price per ton was $ 2,000, variable manufacturing costs were 16% of the sales price of units produced, variable selling expenses were 10% of the selling price of units sold, fixed manufacturing costs were $ 2,788,000, and fixed administrative expenses were $ 530,000 Prepare income statements for each year using absorption costing. Reconcile the differences each year in net income under the two costing approaches.

Answer 1

Year 1:

Absorption costing income statement:
Particulars	Per unit	Number of units	Amount
Sales	$    2,000	3,075	$      6,150,000
Minus:
Cost of goods sold:
Variable manufacturing costs	$       320	3,075	$         984,000
Fixed manufacturing costs	$       680	3,075	$      2,091,000
Total cost of goods sold	$    1,000		$      3,075,000
Gross profit	$    1,000		$      3,075,000
Minus:
Selling and administrative expenses:
Variable selling and administrative	$       200	3,075	$         615,000
Fixed selling and administrative			$         530,000
Total selling and administrative expenses			$      1,145,000
Net operating income			$      1,930,000

Variable costing income statement
Particulars	Per unit	Number of units	Amount
Sales	$    2,000	3,075	$ 6,150,000
Minus:
Variable costs
Variable manufacturing overhead	$       320	3,075	$    984,000
Variable selling and administrative expenses	$       200	3,075	$    615,000
Total variable costs	$       520		$ 1,599,000
Contribution	$    1,480		$ 4,551,000
Minus:
Fixed costs:
Fixed manufacturing overhead			$ 2,788,000
Fixed selling and administrative expenses			$    530,000
Total fixed costs			$ 3,318,000
Net operating income			$ 1,233,000

Particulars	Amount
Net operating income under absorption costing	$ 1,930,000
Less
Fixed manufacturing overhead capitalized as part of closing inventory under absorption costing	$    697,000
Net operating income under variable costing	$ 1,233,000

Particulars	Amount
Total fixed manufacturing overhead	$    2,788,000
Total production units	4,100
Fixed manufacturing overhead per unit	$               680
Allocation of fixed manufacturing overhead
Particulars	Units	Per unit	Amount
Cost of goods sold	3,075	$       680	$ 2,091,000
Ending inventory	1,025	$       680	$    697,000
Total			$ 2,788,000

Year 2017:

Absorption costing income statement:
Particulars	Per unit	Number of units	Amount
Sales	$    2,000	4,100	$      8,200,000
Minus:
Cost of goods sold:
Variable manufacturing costs	$       320	4,100	$      1,312,000
Fixed manufacturing costs		4,100	$      3,485,000
Total cost of goods sold	$       320		$      4,797,000
Gross profit	$    1,680		$      3,403,000
Minus:
Selling and administrative expenses:
Variable selling and administrative	$       200	4,100	$         820,000
Fixed selling and administrative			$         530,000
Total selling and administrative expenses			$      1,350,000
Net operating income			$      2,053,000

Variable costing income statement
Particulars	Per unit	Number of units	Amount
Sales	$    2,000	4,100	$ 8,200,000
Minus:
Variable costs
Variable manufacturing overhead	$       320	4,100	$ 1,312,000
Variable selling and administrative expenses	$       200	4,100	$    820,000
Total variable costs	$       520		$ 2,132,000
Contribution	$    1,480		$ 6,068,000
Minus:
Fixed costs:
Fixed manufacturing overhead			$ 2,788,000
Fixed selling and administrative expenses			$    530,000
Total fixed costs			$ 3,318,000
Net operating income			$ 2,750,000

Particulars	Amount
Net operating income under absorption costing	$ 2,053,000
Add
Fixed manufacturing overhead capitalized as part of closing inventory last year and expensed now under absorption costing	$    697,000
Net operating income under variable costing	$ 2,750,000