Question

uring the first month of operations which ended February, Smooth Skin Care Products manufactured 10,000 bottles, of which 8,000 were sold. Operating data for the month are as follows:

Production costs (10,000 bottles):
Direct materials	$140,000
Direct labor	40,000
Variable factory overhead	20,000
Fixed factory overhead	4,000	$204,000
Operating expenses:
Variable operating expenses	$ 34,000
Fixed operating expenses	2,000	36,000

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Sales total $300,000 for the month.

During March, Smooth Skin manufactured 6,000 bottles and 8,000 were sold. Operating data for March are as follows:

Production costs (6,000 bottles):
Direct materials	$84,000
Direct labor	24,000
Variable factory overhead	12,000
Fixed factory overhead	4,000	$124,000
Operating expenses:
Variable operating expenses	$ 34,000
Fixed operating expenses	2,000	36,000

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Sales total $300,000 for the month.

REQUIRED:

1.      Using absorption costing, prepare income statements for February & March

2.      Using variable costing, prepare income statement for February

Answer 1

Income statement for February as per absorption costing

Particular	Amount	Amount
Sales		300000
Less Cost of production
Direct material	140000
Direct labour	40000
Variable factory overhead	20000
Fixed factory overhead	4000
Cost of production	204000
Less closing stock	(40800) (See work note)
Cost of good sold		163200
Gross profit		136800
Less operating expenses
Variable operating expense	34000
Fixed operating expense	2000
Operating expense		36000
Net profit		100800

Computation of cost of closing stock

Cost of production =204000

No of units in closing stock =2000

Cost of closing stock =204000*2000/10000=40800

Computation of net profit for February month as per Variable costing

Particular	Amount	Amount
Sales		300000
Less variable costs
Direct material	140000
Direct labour	40000
Variable overheads	20000
Variable expenses	34000
	234000
Less closing stock	(46800)	187200
Contribution		112800
Les Fixed costs
Fixed factory overheads	4000
Fixed operating expense	2000	6000
Net profit		108800

Variable cost incurred for 10000 units =234000

Variable cost for 2000 closing units=

234000*2000/10000=46800

Income statement

March

As per absorption costing

Particular Amount Amount Sales 300000 Less cost of production Opening stock 40800 Direct material 84000 Direct labour 24000 Variable production overhead 12000 Fixed production overhead 4000 Cost of goods sold 164800 Gross profit 135200 Less Operating epenses Variable operating expense 34000 Fixed operating expense 2000 36000 Net profit 99200