Question

Variable Costing Income Statement

On July 31, the end of the first month of operations, Rhys Company prepared the following income statement, based on the absorption costing concept:

Sales (20,000 units)					$1,520,000
Cost of goods sold:
	Cost of goods manufactured		$1,152,000
	Less ending inventory (4,000 units)		192,000
	Cost of goods sold				960,000
Gross profit					$560,000
Selling and administrative expenses					112,000
Income from operations					$448,000

a. Prepare a variable costing income statement, assuming that the fixed manufacturing costs were $72,000 and the variable selling and administrative expenses were $51,000. In your computations, round unit costs to two decimal places and round final answers to the nearest dollar.

Rhys Company
Income Statement-Variable Costing
For the Month Ended July 31
Sales		$
Variable cost of goods sold:
Variable cost of goods manufactured	$
Less ending inventory
Variable cost of goods sold
Manufacturing margin		$
Variable selling and administrative expenses
Contribution margin		$
Fixed costs:
Fixed manufacturing costs	$
Fixed selling and administrative expenses
Income from operations		$

b. Reconcile the absorption costing income from operations of $448,000 with the variable costing income from operations determined in (a).

Reconciliation of Absorption and Variable Costing Income
Absorption costing income from operations	$
Variable costing income from operations
Difference	$

Answer 1

Answer :

a.

Rhys Company
Income Statement-Variable Costing
For the Month Ended July 31
Sales		$ 1520000
Less - Variable cost of goods sold:
Variable cost of goods manufactured	$ 1080000
Less - Ending inventory ( 4000*$ 45)	$ 180000
Variable cost of goods sold		$ 900000
Manufacturing margin		$ 620000
Variable selling and administrative expenses		$ 51000
Contribution margin		$ 569000
Fixed costs:
Fixed manufacturing costs		$ 72000
Fixed selling and administrative expenses		$ 61000
Income from operations		$ 436000

Working note - 1

Variable cost of goods manufactured = Cost of goods manufactured - Fixed Manufacturing cost

= $ 1152000 - $ 72000 = $ 108000

Units manufactured = Sales + Closing inventory

= 20000 +4000 = 24000 unit

Variable cost of goods manufactured per unit = Total cost of Manufacture / Units manufactured

= $ 1080000 / 24000 = $ 45

Ending inventory = 4000*$ 45 = $ 180000

Fixed selling and administrative expenses = $ 112000- $ 51000 = $ 61000

b.

Reconciliation of Absorption and Variable Costing Income
Absorption costing income from operations	$ 448000
Variable costing income from operations	$ 436000
Difference	$ 12000
Fixed manufacturing overhead Deferred in closing inventory	$ 12000

Working note -2

Fixed manufacturing overhead Deferred in closing inventory = Ending inventory * Fixed manufacturing overhead per unit

= 4000 unit * $ 3 = $ 12000

Fixed manufacturing overhead per unit = Fixed manufacturing overhead/ output

= $ 72000/24000 = $ 3