Question

On July 31, the end of the first month of operations, Rhys Company prepared the following income statement, based on the absorption costing concept: Sales (20,000 units) $1,200,000 Cost of goods sold: Cost of goods manufactured $930,000 Less ending inventory (4,000 units) 155,000 Cost of goods sold 775,000 Gross profit $425,000 Selling and administrative expenses 112,000 Income from operations $313,000

a. Prepare a variable costing income statement, assuming that the fixed manufacturing costs were $72,000 and the variable selling and administrative expenses were $51,000. In your computations, round unit costs to two decimal places and round final answers to the nearest dollar.

b. Reconcile the absorption costing income from operations of $313,000 with the variable costing income from operations determined in (a).

Reconciliation of Absorption and Variable Costing Income
Absorption costing income from operations	$
Variable costing income from operations
Difference	$

Answer 1

	units produced = 20000+4000
			24000
		unit product cost under Absorption costing
			(930000/24000)
			38.75
		Fixed manufacturing overhead per unit = 72,000/24000
						3
		Variable costing unit product cost = 38.75-3
					35.75
		income statement-variable costing
sales							1,200,000
Variable cost of goods sold
variable cost of goods manufactured				(24000*35.75)=		858000
less ending inventory				(4000*35.75)		143000
variabel cost of goods sold							715000
manufacturing margin							485,000
variable selling and administrative expense							51,000
contribution margin							434,000
fixed costs:
fixed manufacturing costs							72,000
fixed selling & administrative expense							61,000
income from operations							301,000
B)
	Absorption costing income from operations						313,000
	variable costing income from operations						301,000
	Difference						12,000