Question

A company produces soccer balls for amateur soccer players. Last year, the company reached its planned production of 20,000 balls and sold all but 2,000 balls. The balls sell for $50 each. Costs incurred in the production of the balls are as follows:

Materials used	40,000
Other Variable production costs	60,000
Fixed production costs	100,000
Variable selling costs	18,000
Fixed selling and administrative costs	100,000

Company uses a normal costing system.

Prepare an income statement under (i) variable costing and (ii) absorption costing

Answer 1

Income Statement (Variable costing)
Sales revenue (18,000*$50)		$ 900,000
Less: Variable expenses
Materials ($40,000/20,000*18,000)	$    36,000
Other Variable production costs ($60,000/20,000*18,000)	$    54,000
Variable selling and administrative costs	$    18,000
Total variable expenses		$ 108,000
Contribution margin		$ 792,000
Less: Fixed cost
Fixed production costs	$ 100,000
Fixed selling and administrative costs	$ 100,000
Total fixed costs		$ 200,000
Net operating income		$ 592,000

2.

Income Statement (Absorption costing)
Sales revenue (18,000*$50)		$ 900,000
Less: Cost of goods sold
Materials ($40,000/20,000*18,000)	$    36,000
Other Variable production costs ($60,000/20,000*18,000)	$    54,000
Fixed production costs ($100,000/20,000*18,000)	$    90,000
Cost of goods sold		$ 180,000
Gross margin		$ 720,000
Less: Selling and administrative costs
Variable selling and administrative costs	$    18,000
Fixed selling and administrative costs	$ 100,000
Total selling and administrative costs		$ 118,000
Net operating income		$ 602,000

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