Question

Baggy Green Co. produces cricket kits for amateur and backyard cricket enthusiasts. Last year, the company reached its planned production of 20,000 kits and sold all but 2,000 kits. The kits sell for $50 each. Costs incurred in the production of the kits 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

Baggy Green Co. uses a normal costing system.

Required:

1. Prepare an income statement under (i) variable costing and (ii) absorption costing
2. Reconcile the differences in reported income under variable and absorption costing. Explain how the differences occur

Answer 1

i

Variable costing income statement
Particulars	Amount	Amount
Sales		$            900,000
Variable expenses:
Direct material	$            36,000
Direct labor	$                     -
Variable costs	$            54,000
Variable selling expenses	$            18,000
Total variable expenses	$          108,000	$            108,000
Contribution margin		$            792,000
Fixed expenses:
Fixed manf overhead	$          100,000
Fixed selling expenses	$          100,000
Total fixed expenses		$            200,000
Variable costing net income		$            592,000

ii

Absorption costing income statement
Particulars	Amount	Amount
Sales		$            900,000
Cost of goods sold:
Beginning inventory	$                     -
Direct materials	$            40,000
Direct labor	$                     -
Variable Manf OH	$            60,000
Fixed Manf OH	$          100,000
Less: ending inventory	$           (20,000)
Cost of goods sold	$          180,000	$          (180,000)
Gross profit		$            720,000
Other expenses:
Selling and administrative - Variable		$            (18,000)
Selling and administrative - Fixed		$          (100,000)
Net income		$            602,000

Reco:

Reconciliation:
Net income as per absorption costing	602,000
Less: fixed costs in ending inventory	(10,000)
Net profit as per variable costing	592,000