Question

Jackson Company produces plastic that is used for injection-molding applications such as gears for small motors. In 2019, the first year of operations, Jackson produced 5,700 tons of plastic and sold 4,275 tons. In 2020, the production and sales results were exactly reversed. In each year, the selling price per ton was $2,000, variable manufacturing costs were 18% of the sales price of units produced, variable selling expenses were 9% of the selling price of units sold, fixed manufacturing costs were $3,762,000, and fixed administrative expenses were $550,000.

(1). Prepare income statements for each year using variable costing.

(2). Prepare income statements for each year using absorption costing.

(3). Reconcile the differences each year in net income under the two costing approaches.

Answer 1

Variable Costing income statement
Sales		8550000		11400000
Less: Variable Expenses
Beginning Invenotry			1533300
Add: Cost of goods manufactured	6133200		4599900
Goods available for sale	6133200		6133200
Less: Ending Inventory	1533300		0
Variable cost of goods sold	4599900		6133200
Variable selling and administrative cost	769500		1026000
Contribution Margin		3180600		4240800
Less: Fixed Expenses
Manufacturing Overhead	3762000		3762000
Selling and administrative	550000		550000
Net operating income		-1131400		-71200

Absorption Costing Income Statement
Sales		8550000		11400000
Beginning Invenotry			2473800
Add: Cost of goods manufactured	9895200		8361900
Goods available for sale	9895200		10835700
Less: Ending Inventory	2473800		0
Cost of goods sold	7421400		10835700
Gross Profit		1128600		564300
Selling and administrative cost	1319500		1576000
Net operating income		-190900		-1011700

Reconcilation	Year 1	Year 2
Net operating income (Absorption Costing)	-190900	-1011700
Add: Fixed Manufacturing OH deffered		940500
Less: Fixed Manufacturing OH Released	940500	0
in Closing Inventories
Net operating income (Variable Costing)	-1131400	-71200