Question

During the current period, McLaughlin Company sold 60,000 units of product at $30 per unit. At the beginning of the period, there were 10,000 units in inventory and McLaughlin Company manufactured 50,000 units during the period. The manufacturing costs and selling and administrative expenses were as follows:

Total Cost Number of Units Unit Cost

Beginning inventory:

Direct materials.....................................$ 67,000 10,000 $ 6.70

Direct labor........................................ 155,000 10,000 15.50

Variable factory overhead...........................18,000 10,000 1.80

Fixed factory overhead............................. 20,000 10,000 2.00

Total . . . . . . . . . . . . . . . . . . . . . . . . . . $ 260,000 $26.00

Current period costs:

Direct materials.....................................$350,000 50,000 $ 7.00

Direct labor........................................ 810,000 50,000 16.20

Variable factory overhead...........................90,000 50,000 1.80

Fixed factory overhead.............................100,000 50,000 2.00

Total . . . . . . . . . . . . . . . . . . . . . . . . . $1,350,000 $27.00

Selling and administrative expenses:

Variable............................................ $ 65,000

Fixed ...............................................    45,000

Total . . . . . . . . . . . . . . . . . . . . . . . . $ 110,000

Instructions

1. Prepare an income statement based on the absorption costing concept.

2. Prepare an income statement based on the variable costing concept.

3. Give the reason for the difference in the amount of income from operations in parts (1)

and (2).

Answer 1

1) Income Statement based on the absorption costing concept ;-

Particulars	Amount($)	Amount($)
Sales(60000*$30)		1800000
Less : Cost of Goods Sold
Direct Matrial ($67000+$350000)	367000
Direct Labor ($155000+$810000)	965000
Variable Factory Overhead ($18000+$90000)	$108000
Fixed Factory Overhead ($20000+$100000)	$120000
Total Cost of Goods Sold	$1560000	($1560000)
Gross Profit ($1800000-$1560000)		$240000
Less : Selling and Admini. Expenses
Variable Expense	$65000
Fixed Expense	$45000
Total Selling and Admini. Expenses	$110000	($110000)
Net Income ($240000 - $110000)		$130000

2) Income Statement Based on the Variable Costing :-

Particulars	Amount($)	Amount($)
Sales		1800000
Less : Variable Expenses:-
Direct Materials($67000+$300000)	367000
Direct Labor($155000+$810000)	965000
Variable Factory Overhead($18000+$90000)	108000
Variable Selling and Admini. Exp.	65000
Total Variable Expense	1505000	(1505000)
Contribution ($1800000-$1505000)		295000
Less : Fixed Expenses
Fixed Factory Overhead	100000
Selling and Admini. Exp	45000
Total Fixed Expenses	145000	(145000)
Net Income ($295000-$145000)		150000

3)

Particulars	Amount($)
Net Income from Absorption Costing	130000
Add : Fixed Factory Overhead of opening Inventories	20000
Net Income from Variable Costing	150000