Question

manufactures one product, cleverly named "Product A". The Income Statement below represents the operating results for the fiscal year just ended, December 31, 2017, and reflects their use of VARIABLE COSTING for internal purposes. NEW JERSEY produced and sold 1,800 tons of Product A during the current year. The manufacturing capacity of NEW JERSEY's facilities is 3,000 tons of Product A.

NEW JERSEY CORP.

INCOME STATEMENT

For the year ended December 31, 2017

Sales				$ 900,000
Variable costs
Manufacturing				315,000
Selling costs				180,000
Total variable costs				$ 495,000
Contribution margin				$ 405,000
Fixed costs
Manufacturing				90,000
Selling				112,500
Administration				45,000
Total fixed costs				$ 247,500
Net income before income taxes				157,500
Income taxes (40%)				(63,000)
Net income after income taxes				$   94,500

REQUIRED:

1. The financial statements shown above were prepared on a Variable Costing basis. What does that mean?

2. While the Variable costing statement is helpful for decision making, it is not permitted for GAAP or IFRS. Recast the December 31, 2017 statements (shown above) in a way that reflects absorption costing, consistent with GAAP. Assume that there were no changes in raw materials, work-in-process or finished-goods inventories during the year (beginning and ending finished goods inventory was zero).

3. NOW ASSUME that the company actually produced 2,000 units during the year, but only sold the 1,800 indicated above? (Assume beginning finished goods are 0 units, and ending finished goods are 200 units). Prepare income statements using both variable costing AND using full absorption costing.

4. Consider the pre-tax income shown on the two absorption-costing income statements prepared above. Was it the same or different? Why? Does it make economic sense? Why or why not?

5. Considering the pre-tax income shown on the variable-costing statement, how does it compare with the absorption-costing income statement for this same scenario (2,000 produced, 1,800 sold)? Why? How does this statement compare with the variable-costing statement originally given (1,800 produced and sold)? Why? Exactly HOW can we account for the difference

Answer 1