Question

Sims Company, a manufacturer of tablet computers, began operations on January 1, 2019. Its cost and sales information for this year follows. Manufacturing costs Direct materials $ 35 per unit Direct labor $ 55 per unit Overhead costs Variable $ 20 per unit Fixed $ 8,800,000 (per year) Selling and administrative costs for the year Variable $ 725,000 Fixed $ 4,500,000 Production and sales for the year Units produced 110,000 units Units sold 80,000 units Sales price per unit $ 350 per unit 1. Prepare an income statement for the year using variable costing. 2. Prepare an income statement for the year using absorption costing.

Answer 1

1. Income statement for the year using variable costing

Particulars			$		Units				Amount
Sales			350	X	80000				$ 28,000,000
Variable Expenses
Manufacturing costs
Direct materials			35.00	X	80000		$ 2,800,000.00
Direct labor			55.00	X	80000		$ 4,400,000.00
Overhead costs Variable			20.00	X	80000		$ 1,600,000.00
Selling and administrative costs			9.06	X	80000		$      725,000.00		$    9,525,000
									$ 18,475,000
Fixed Expenses
Fixed							$ 8,800,000.00
Selling and administrative costs							$ 4,500,000.00		$ 13,300,000
Net Income									$    5,175,000

Number of Closing Stock	=	Production - Sales
	=	1,10,000 - 80,000
	=	30,000 units
Value of Closing Stock	=	35+55+20
	=	110 Per Unit
	=	110 X 30,000
	=	$ 3,300,000.00

2. Income statement for the year using absorption costing

Particulars			$		Units				Amount
Sales			350	X	80000				$ 28,000,000
Cost of Goods Sold
Manufacturing costs
Direct materials			35.00	X	80000		$ 2,800,000.00
Direct labor			55.00	X	80000		$ 4,400,000.00
Overhead costs Variable			20.00	X	80000		$ 1,600,000.00
Selling and administrative costs			9.06	X	80000		$      725,000.00
Fixed Manufacturing			$     80.00	X	80000		$ 6,400,000.00		$ 15,925,000
									$ 12,075,000
Period Expenses
Selling and administrative costs							$ 4,500,000.00		$    4,500,000
Net Income									$    7,575,000

Number of Closing Stock	=	Production - Sales
	=	1,10,000 - 80,000
	=	30,000 units
Value of Closing Stock	=	35+55+20+80
	=	190 Per Unit
	=	190 X 30,000
	=	$ 5,700,000.00

Note :

1. In marginal costing all fixed costs are considered to be period costs and is matched against the revenue of the period. Only Manufacturing Variable costs get reflected in the value of the stock.

2. Under absorbtion costing Fixed Manufacturing costs are also considered to be an expense directly related to the product. Thus the same is also included in the value of the stock. Only Fixed Selling and Administration expenses are considered as period expenses.