In: Accounting
Required information
Exercise 19-7 Income reporting under absorption costing and variable costing LO P2
[The following information applies to the questions
displayed below.]
Oak Mart, a producer of solid oak tables, reports the following
data from its second year of business.
Sales price per unit | $ | 300 | per unit |
Units produced this year | 120,000 | units | |
Units sold this year | 123,750 | units | |
Units in beginning-year inventory | 3,750 | units | |
Beginning inventory costs | |||
Variable (3,750 units × $135) | $ | 506,250 | |
Fixed (3,750 units × $70) | 262,500 | ||
Total | $ | 768,750 | |
Manufacturing costs this year | |||
Direct materials | $ | 50 | per unit |
Direct labor | $ | 70 | per unit |
Overhead costs this year | |||
Variable overhead | $ | 3,200,000 | |
Fixed overhead | $ | 7,200,000 | |
Selling and administrative costs this year | |||
Variable | $ | 1,400,000 | |
Fixed | 4,000,000 | ||
Exercise 19-7 Part 2
2. Prepare the current year income statement
for the company using absorption costing.
Solution
Oak Mart Company | ||
Absorption Costing - Income Statement | ||
Sale Revenue (123750*$300) | $3,71,25,000 | |
Beginning Inventory | ||
Variable | $5,06,250 | |
Fixed | $2,62,500 | |
Manufacturing Cost this year | ||
Direct Material | $60,00,000 | |
Direct Labor | $84,00,000 | |
variable Overhead | $32,00,000 | |
Fixed Overhead | $72,00,000 | |
Total Cost of goods sold | $2,55,68,750 | |
Gross Profit | $1,15,56,250 | |
Selling and administrative cost: | ||
Variable | $14,00,000 | |
Fixed | $40,00,000 | |
Total Selling administrative cost | $54,00,000 | |
Net Operating Income | $61,56,250 | |
Net Income under absorption costing is less than Net income under Variable costing by ($6156250 - 6418750) | -$2,62,500 | |
Number of units added to (substructed from) Inventory | -3750 | |
Fixed Overhead cost per unit | $70 | |
Fixed costs added to Inventory (3750*$70) | -$2,62,500 |
Oak Mart Company | ||
Variable Costing - Income Statement | ||
Sale Revenue (123750*$300) | $3,71,25,000 | |
Beginning Inventory | ||
Variable | $5,06,250 | |
Manufacturing Cost this year | ||
Direct Material (115000*$42) | $60,00,000 | |
Direct Labor (115000*$68) | $84,00,000 | |
variable Overhead | $32,00,000 | |
Selling and administrative cost: | ||
Variable | $14,00,000 | |
Total Variable cost | $1,95,06,250 | |
Contribution margin | $1,76,18,750 | |
Less: Fixed costs | ||
Fixed Overhead | $72,00,000 | |
Fixed Selling & Administrative Expenses | $40,00,000 | |
Total Fixed Costs | $1,12,00,000 | |
Net Income (Loss) | $64,18,750 |