Question

Johnson Corp. prepared the following absorption-costing income statement for the year ended May 31, 20X1.

Sales, 16,000 units                                        $640,000

Cost of goods sold                                         432,000

Gross margin                                               $208,000

Selling and administrative expenses            92,000

Operating income                                       $116,000

Additional information follows:

Selling and administrative expenses include $3 of variable cost per unit sold. There was no beginning inventory, and 17,500 units were produced. Variable manufacturing costs were $22 per unit. Actual fixed costs were equal to budgeted fixed costs.

Required: Prepare a variable costing income statement for the same period.

Answer 1

Variable costing income statement separates variable costs and fixed costs. Variable costs are expensed as product costs and fixed costs are charged fully as period costs.

Units sold = 16,000
Sales = $640,000

Total cost of goods sold = $432,000

Variable manufacturing cost per unit = $22 per unit

Cost of goods sold per unit = $432,000 ÷ 16,000 = $27 per unit

Cost of goods sold per unit = Variable manufacturing cost per unit + Fixed manufacturing cost per unit
$27 = $22 + Fixed manufacturing cost per unit

Fixed manufacturing cost per unit = $27 - $22 = $5 per unit

Budgeted Fixed manufacturing overhead (Actual fixed manufacturing costs) = Units produced × Fixed manufacturing overhead per unit = 17,500 × $5 = $87,500

Total selling and administrative expenses = $92,000

Variable selling and administrative expenses per unit = $3

Variable selling and administrative expenses = Units sold × Per unit cost = 16,000 × $3 = $48,000

Fixed selling and administrative expenses = Total selling and administrative expenses - Variable selling and administrative expenses = $92,000 - $48,000 = $44,000

Note: Fixed manufacturing cost deferred in ending inventory under absorption costing = Ending inventory × Fixed manufacturing cost per unit = (17,500 - 16,000) × $5 = $7,500