Question

Estimated Income Statements, using Absorption and Variable Costing

Prior to the first month of operations ending October 31, Marshall Inc. estimated the following operating results:

Sales (28,000 x $98)	$2,744,000
Manufacturing costs (28,000 units):
Direct materials	1,660,400
Direct labor	392,000
Variable factory overhead	184,800
Fixed factory overhead	218,400
Fixed selling and administrative expenses	59,400
Variable selling and administrative expenses	71,900

The company is evaluating a proposal to manufacture 31,200 units instead of 28,000 units, thus creating an ending inventory of 3,200 units. Manufacturing the additional units will not change sales, unit variable factory overhead costs, total fixed factory overhead cost, or total selling and administrative expenses.

a. 1. Prepare an estimated income statement, comparing operating results if 28,000 and 31,200 units are manufactured in the absorption costing format. If an amount box does not require an entry leave it blank.

Marshall Inc.
Absorption Costing Income Statement
For the Month Ending October 31
	28,000 Units Manufactured	31,200 Units Manufactured
Sales	$	$
Cost of goods sold:
Cost of goods manufactured	$	$
Inventory, October 31
Total cost of goods sold	$	$
Gross profit	$	$
Selling and administrative expenses
Operating income	$	$

Feedback

a. 2. Prepare an estimated income statement, comparing operating results if 28,000 and 31,200 units are manufactured in the variable costing format. If an amount box does not require an entry leave it blank.

Marshall Inc.
Variable Costing Income Statement
For the Month Ending October 31
	28,000 Units Manufactured	31,200 Units Manufactured
Sales	$	$
Variable cost of goods sold:
Variable cost of goods manufactured	$	$
Inventory, October 31
Total variable cost of goods sold	$	$
Manufacturing margin	$	$
Variable selling and administrative expenses
Contribution margin	$	$
Fixed costs:
Fixed factory overhead	$	$
Fixed selling and administrative expenses
Total fixed costs	$	$
Operating income	$	$

Income Statements under Absorption Costing and Variable Costing

Fresno Industries Inc. manufactures and sells high-quality camping tents. The company began operations on January 1 and operated at 100% of capacity (77,000 units) during the first month, creating an ending inventory of 7,000 units. During February, the company produced 70,000 units during the month but sold 77,000 units at $85 per unit. The February manufacturing costs and selling and administrative expenses were as follows:

	Number of Units		Unit Cost		Total Cost
Manufacturing costs in February 1 beginning inventory:
Variable	7,000		$34.00		$238,000
Fixed	7,000		13.00		91,000
Total			$47.00		$329,000
Manufacturing costs in February:
Variable	70,000		$34.00		$2,380,000
Fixed	70,000		14.30		1,001,000
Total			$48.30		$3,381,000
Selling and administrative expenses in February:
Variable	77,000		$16.90		$1,301,300
Fixed	77,000		7.00		539,000
Total			$23.90		$1,840,300

a. Prepare an income statement according to the absorption costing concept for the month ending February 28.

Fresno Industries Inc.
Absorption Costing Income Statement
For the Month Ended February 28
Sales		$
Cost of goods sold:
Beginning inventory	$
Cost of goods manufactured
Total cost of goods sold
Gross profit		$
Selling and administrative expenses
Operating income		$

Feedback

a. Under absorption costing, the cost of goods manufactured includes direct materials, direct labor, and factory overhead costs. Both fixed and variable factory costs are included as part of factory overhead.

b. Prepare an income statement according to the variable costing concept for the month ending February 28.

Fresno Industries Inc.
Variable Costing Income Statement
For the Month Ended February 28
Sales		$
Variable cost of goods sold
Manufacturing margin		$
Variable selling and administrative expenses
Contribution margin		$
Fixed costs:
Fixed manufacturing costs	$
Fixed selling and administrative expenses
Total fixed costs
Operating income		$

Answer 1

Absorption costing
COGS	For 28000 units	Per unit ccost	For 31200 units
Direct materials	1660400	59.3	1850160
Direct labor	392000	14	436800
Variable factory overhead	184800		184800
Fixed factory overhead	218400		218400
Total manufacturingcosts	2455600		2690160
Units	28000		31200
Per unit cost	87.7		86.22307692
Income statement
	For 28000 units	For 32000 units
Sales	2744000	2744000
COGS
Opening stock	0	0
Manufacturing costs	2455600	2690160
Closing stock	0	275904	2405200
Gross Margin	288400	329744
Operating expenses
Fixed selling and administrative	59400	59400
Variable selling and administrative	71900	71900
Total operating expense	131300	131300
Operating profit	157100	198444
Variable costing
COGS	For 28000 units	Per unit ccost	For 31200 units
Direct materials	1660400	59.3	1850160
Direct labor	392000	14	436800
Variable factory overhead	184800		184800
Fixed factory overhead	0		0
Total manufacturingcosts	2237200		2471760
Units	28000		31200
Per unit cost	79.9		79.22307692
Income statement
	For 28000 units	For 32000 units
Sales	2744000	2744000
COGS
Opening stock	0	0
Manufacturing costs	2237200	2471760
Closing stock	0	253504
Gross Margin	506800	525744
Variable selling and administrative	71900	71900
Contribution margin	434900	453844
Fixed costs
Fixed factory overhead	218400	218400
Fixed selling and administrative	59400	59400
Total fixed costs	277800	277800
Operating profit	157100	176044

Manufacturing costs in February 1 beginning inventory:		Unit cost
Variable	7,000	34	238000
Fixed	7,000	13	91,000
Total		47	329000
Manufacturing costs in February:
Variable	70,000	34	2380000
Fixed	70,000	14.3	10,01,000
Total		48.3	3381000
Selling and administrative expenses in February:
Variable	77,000	16.9	1301300
Fixed	77,000	7	539000
Total		23.9	1840300

Absorption costing
Sales	6545000
Cost of goods sold
Opening	329000	Fixed plus variable
Manufactured during the month	3381000	Fixed plus variable
Ending inventory	0
Total COGS	3710000
Gross margin	2835000
Operating expenses
Selling and administartive variable	1301300
Selling and administartive Fixed	539000
Total operating costs	1840300
Operating income	994700
Variable costing
Sales	6545000
Cost of goods sold
Opening	238000	only variable, fixed costs already expensed last year
Manufactured during the month	2380000	only variable
Ending inventory	0
Total COGS	2618000
Gross margin	3927000
Selling and administartive variable	1301300
Contribution margin	2625700
Fixed costs
Fixed manufacturing costs	10,01,000
Selling and administartive Fixed	539000
Total fixed costs	1540000
Operating income	1085700