Question

Sims Company, a manufacturer of tablet computers, began operations on January 1, 2019. Its cost and sales information for this year follows.

Manufacturing costs
Direct materials	$	40	per unit
Direct labor	$	60	per unit
Overhead costs
Variable	$	30	per unit
Fixed	$	7,000,000	(per year)
Selling and administrative costs for the year
Variable	$	770,000
Fixed	$	4,250,000
Production and sales for the year
Units produced		100,000	units
Units sold		70,000	units
Sales price per unit	$	350	per unit

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

	SIMS COMPANY Variable Costing Income Statement Sales Less: Variable costs Direct materials Direct labor Variable overhead costs Variable selling and administrative expenses Total variable costs Contribution margin Fixed selling and administrative costs Fixed overhead costs    Total fixed expenses Net income (loss)

	SIMS COMPANY Absorption Costing Income Statement Sales    Less: Cost of goods sold Direct materials Direct labor Variable overhead costs Fixed overhead costs Cost of goods sold Gross margin Selling general and administrative expenses Fixed selling and administrative costs Net income (loss)

Answer 1

1)
SIMS COMPANY
Variable Costing Income Statement
Sales (70,000 * $350)		$24,500,000
Less: Variable costs:
Direct materials (70,000 * $40)	$2,800,000
Direct labor (70,000 * $60)	$4,200,000
Variable overheads (70,000 * $30)	$2,100,000
Variable selling and administrative costs	$770,000
Total Variable Costs		$9,870,000
Contribution Margin		$14,630,000
Less: Fixed costs:
Manufacturing overheads	$7,000,000
Selling and administrative expenses	$4,250,000
Total Fixed Costs		$11,250,000
Net Income		$3,380,000
2)
SIMS COMPANY
Absorption Costing Income Statement
Sales (70,000 * $350)		$24,500,000
Less: Cost of goods sold:
Direct materials (70,000 * $40)	$2,800,000
Direct labor (70,000 * $60)	$4,200,000
Variable overheads (70,000 * $30)	$2,100,000
Fixed manufacturing overheads ($7,000,000/100,000 units * 70,000 units)	$4,900,000
Total cost of goods sold		$14,000,000
Gross Margin		$10,500,000
Less: Selling and Administrative expenses:
Variable	$770,000
Fixed	$4,250,000
Total selling and administrative expenses		$5,020,000
Net Income		$5,480,000