Question

Sims Company, a manufacturer of tablet computers, began operations on January 1, 2015. Its cost and sales information for this year follows.

Manufacturing costs
Direct materials	$	35	per unit
Direct labor	$	55	per unit
Overhead costs for the year
Variable overhead	$	4,200,000
Fixed overhead	$	6,300,000
Selling and administrative costs for the year
Variable	$	800,000
Fixed	$	4,500,000
Production and sales for the year
Units produced		105,000	units
Units sold		75,000	units
Sales price per unit	$	360	per unit

1.	Prepare an income statement for the year using variable costing.

      

2.	Prepare an income statement for the year using absorption costing.

        

3.	Under what circumstance(s) is reported income identical under both absorption costing and variable costing?
	Production is greater than sales and inventory levels increase Production is greater than sales and inventory levels decrease Production equals sales and there is no beginning finished goods inventory Production is less than sales and inventory levels decrease Incomes of absorption costing and variable costing will never be identical

Answer 1

Ans.1	Variable costing income statement
	Particulars		Amount
	Sales (360 * 75000)		27000000
	less: Variable Costs:
	Direct material (35 * 75000)		2625000
	Direct labor (55 * 75000)		4125000
	Variable overhead costs (4200000 / 105000 * 75000)		3000000
	Variable selling and Adm. Expenses		800000
	Total Variable costs		10550000
	Contribution margin ( Sales - Variable costs)		16450000
	Less: Fixed costs:
	Fixed selling and Adm. Expenses		6300000
	Fixed overhead costs		4500000
	Total Fixed costs		10800000
	Net Income (Contribution - fixed cost)		5650000
Ans.2	Absorption costing income statement
	Particulars		Amount
	Sales (360 * 75000)		27000000
	less: Cost of goods sold:
	Direct material (35 * 75000)		2625000
	Direct labor (55 * 75000)		4125000
	Variable overhead costs (4200000 / 105000 * 75000)		3000000
	Fixed overhead costs (6300000 / 105000 * 75000)		4500000
	Cost of Goods Sold		14250000
	Gross Margin ( Sales - COGS)		12750000
	Less: Selling & Administratin expenses:
	Variable		800000
	Fixed		4500000
	Total Selling & Administratin expenses		5300000
	Net Income (Gross margin - Total S&Adm. Exp.)		7450000
Ans.3	Option 3rd    Production equals sales and there is no beginning finished goods inventory.