Question

On October 31, the end of the first month of operations, Morristown & Co. prepared the following income statement based on absorption costing:

Morristown & Co.
Absorption Costing Income Statement
For Month Ended October 31, 20--
Sales (2,600 units)				$117,000
Cost of goods sold:
Cost of goods manufactured		$85,500
Less ending inventory (400 units)		11,400
Cost of goods sold				74,100
Gross profit				$42,900
Selling and administrative expenses				21,500
Income from operations				$21,400

If the fixed manufacturing costs were $42,900 and the variable selling and administrative expenses were $14,600, prepare an income statement using variable costing. Filling in the blanks with the following terms chart.

-Fixed manufacturing costs

-Less ending inventory

-Sales

-Variable cost of goods manufactured

-Wages Expense

-Fixed selling and administrative expenses

-Variable cost of goods sold

-Less ending inventory

-Utilities Expense

-Manufacturing margin

-Contribution margin

____________		$
Variable cost of goods sold:
____________	$
___________	$
___________	$
___________		$
___________		$
____________		$
Fixed costs:
____________	$
___________	$
Income from operations		$

Answer 1

Notes -

1, Manufacturing costs - Quantity of goods manufactured = Sales + Closing stock (no info about opening stock is provided)

= 2600 + 400 = 3000 units

Cost of goods manufactured = 85,500 = 42,900 Fixed (Given in the question) + 42,600 Variable (85,500-42,900)

Thus, per unit cost (for 3000 units) = $14.3 Fixed + $14.2 Variable.

This can be cross checked. Value of closing inventory (400 units) = 400*14.3 + 400*14.2 = 11,400 (as per question).

2. Selling and admin expenses - Total = 21,500 = 14,600 Variable (given) + 6,900 Fixed (21,500-14,600)

Thus, variable per unit (For 2600 units) = 5.62

Solution -

Sales		$117,000
Variable Cost of Goods Sold:
Variable cost of goods manufactured (3000*14.2)	$42,600
Less: Ending Inventory (400*14.2)	$5,680
Manufacturing Margin	$80,080
Variable Selling and Admin exp (2600*5.62)	$14,600
Contribution Margin		$65,480
Fixed Costs:
Manufacturing cost	$42,900
Selling and Admin cost	$6,900
Income from Operations		$15,680

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