Question

Below is the variable costing income statement for South Bend Co.

Sales, 6,000 units                                                                        $210,000

Total variable costs:

          Beg. inventory,            680 units              $13,600

          Variable manufacturing cost of

          goods manufactured,       ? units           + 132,000

          Ending inventory,     1,280 units           - (25,600)

          Variable manufacturing cost of goods $120,000

          Variable selling & admin. exp.              + 24,900     ($144,900)

Contribution margin                                                                    $65,100

Total fixed costs:

          Fixed factory overhead                            $19,800

          Fixed selling and admin. expenses       + 15,300       ($35,100)

Operating income                                                                        $30,000

REQUIRED:

1. Prepare an absorption-costing income statement.
2. Reconcile the difference in income.

Answer 1

Absorption costing considers fixed OH as product cost. It deferres into next period through ending inventory.

variable costing considers Fixed OH as period cost. Entired expense is recorded as expense in period in hich it incurs.

Ending inventory = beginning+manufactured-sold

1280= 680 + manufactured-6000

manufactured =6600

Product cost

Variable OH	$20	[$132,000/6,600]
Fixed OH	$3	[$19,800/6600]
	$23 [20+3]

absorption-costing income statement.

Sales		$210,000
Less: cost of goods sold
Beginning inventory [$23*680]	$15,640
Add: Cost of goods manufactured [$23*6600]	$151,800
Less: ending inventory [$23*1280]	($29,440)	$138,000
Gross profit		$72,000
Less: selling and administrative expenses
Fixed	$15,300
Variable	$24,900	$40,200
Net income(Loss)		$31,800 [$72,000-40,200]

reconciliation

Profit as per variable costing	$30,000
Less: difference due to Fixed OH in beginning inventory[680*$3]	[$2,040]
Add: Difference due to fixed OH in Ending Inventory [1280*$3]	$3,840
Profit as per absorption costing	$31,800 [$30,000-2,040+3,840]

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