Question

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JJ produces and sells cotton jerseys. The company uses variable costing for internal purposes and absorption...

JJ produces and sells cotton jerseys. The company uses variable costing for internal purposes and absorption costing for external reporting. At year-end, financial information must be converted from variable costing to absorption costing to satisfy external requirements.

At the end of 2018, management anticipated that 2019 sales would be 20% above 2018 levels. Thus, production for 2019 was increased by 20% to meet the expected demand. However, economic conditions in 2019 kept sales at the 2018 unit level of 40 000. The following data pertain to 2018 and 2019:

2018
2019

Selling price per unit
R20
R20

Sales (units)
40 000
40 000

Beginning inventory (units)
4 000
4 000

Production (units)
40 000
48 000

Ending inventory (units
4 000
?

Production costs per unit (budgeted and actual) for 2018 and 2019 were:
Material R2.25
Labour R3.75
Overhead R1.50
Total R7.50

Annual fixed costs for 2018 and 2019 (budgeted and actual) were:
Production R117 000
Selling and administrative R125 000
Total R242 000

The predetermined OH rate under absorption costing is based on annual capacity of 60 000. Any volume variance is assigned to Cost of Goods Sold.

Required:

3.1 Prepare an Income Statement using variable costing.

3.2 Prepare an Income Statement using absorption costing.

3.3 Reconcile the profits.

Solutions

Expert Solution

in R
Product cost per unit
Variable costing Absorption costing Absorption costing
2018 2019
Material 2.25 2.25 2.25
Labor 3.75 3.75 3.75
Variable Overhead 1.5 1.5 1.5
Fixed overhead 2.925 2.438
(117000/40000 (117000/48000
Total 7.5 10.425 9.9375
ans 1 Variable costing
Income Statement 2018 2019
No. of units sold N 40000 40000
Sales $20*N 800000 800000
Less: Variable expenses
Cost of good sold 7.5*N 300000 300000
Contribution margin 500000 500000
Less: fixed cost
Production 117000
Selling and administrative 125000 242000 242000
Net operating income 258000 258000
ans 2
Absorption costing
Income statement
Income Statement 2018 2019
No. of units sold N 40000 40000
Sales $20*N 800000 800000
Less: Cost of good sold 10.425*N 417000 397500
Gross profit 383000 402500
Less: selling & adm exp 125000 125000
Net opearting income 258000 277500
ans 3
Reconcile the profits
Income under variable costing 258000 258000
Add:Fixed manufacturing deferred in Ending Inventory 0 19500 8000*2.438
Income under absorption costing 258000 277500
If any doubt please comment

ekkarill92 answered 2 years ago
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