Question

Appliance Apps has the following costs associated with its production and sale of devices that allow appliances to receive commands from cell phones.

Beginning Inventory	0
Units Produced	26,000
Units Sold	20,800
Selling Price per Unit	$145
Variable Sales and Administration Expenses	$4
Fixed Sales and Administration Expenses	$1,014,000
Direct Material Cost per Unit	$25
Direct Labor Cost per Unit	$10
Variable Manufacturing Overhead Cost per Unit	$3
Fixed Manufacturing Overhead Cost per Month	$1,016,600

Prepare an income statement under the absorption method. If an amount box does not require an entry, leave it blank.

Appliance Apps
Income Statement: Absorption
Sales		$
Cost of Goods Sold:
Beginning Inventory	$
Cost of Goods Manufactured
Cost of Goods Available for Sale	$
Ending Inventory
Total Cost of Goods Sold
Gross Profit		$
Sales and Administrative Expenses:
Variable	$
Fixed
Total Fixed Sales and Administrative Expenses
Net Operating Income		$

Prepare an income statement under the variable costing method. If an amount box does not require an entry, leave it blank.

Appliance Apps
Income Statement: Variable
Sales		$
Cost of Goods Sold:
Beginning Inventory	$
Cost of Goods Manufactured
Cost of Goods Available for Sale	$
Ending Inventory
Total Cost of Goods Sold
Gross Contribution Margin		$
Sales and Administrative Expenses:
Variable
Contribution Margin		$
Fixed Sales and Administrative Expenses	$
Fixed Manufacturing
Total Fixed Sales and Administrative Expenses
Net Operating Income		$

Feedback

Absorption costing includes all costs necessary for production. Conversely, variable costing only uses the variable costs that relate directly to the production process. Keep this in mind when calculating net income under each assumption. Depending on the cost method chosen, there will be differences due to the way fixed costs are treated under each method (absorption and variable).

Prepare a reconciliation between the two statements.

Reconciliation
Net Income under Variable Costing	$
Add: Fixed Manufacturing Overhead Deferred
Net Income under Absorption	$

Feedback

Absorption costing includes all costs necessary for production. Conversely, variable costing only uses the variable costs that relate directly to the production process. Keep this in mind when calculating net income under each assumption. Depending on the cost method chosen, there will be differences due to the way fixed costs are treated under each method (absorption and variable).

Answer 1

a.)	Income statement: absorption
	Sales	3,016,000	(20,800 x 145 )
	Less: Cost of Goods Sold:
	Beginning Inventory	-
	Add: Cost of Goods Manufactured	2,004,600	(26,000 x (25 + 10 + 3 ) ) + 1,016,600
	Cost of Goods Available for Sale	2,004,600	( 0 + 2,004,600 )
	Less :Ending Inventory	400,920	(2,004,600 / 26,000) x (26,000 - 20,800 )
	Total Cost of Goods Sold	1,603,680
	Gross Profit	1,412,320
	Sales and Administrative Expenses:
	Variable	83,200	( 20,800 x 4 )
	Fixed	1,014,000
	Less: Total Fixed Sales and Administrative Expenses	1,097,200
	Net Operating Income	315,120
b.)	Income statement: Variable
	Sales	3,016,000	(20,800 x 145 )
	Less: Cost of Goods Sold:
	Beginning Inventory	-
	Add: Cost of Goods Manufactured	988,000	(26,000 x (25 + 10 + 3 ) )
	Cost of Goods Available for Sale	988,000
	Less: Ending Inventory	197,600	(5,200 x ( 25 +10 +3 ) )
	Total Cost of Goods Sold	790,400
	Gross Contribution Margin	2,225,600
	Less: Sales and Administrative Expenses:
	Variable	83,200	( 20,800 x 4 )
	Contribution Margin	2,142,400
	Fixed Sales and Administrative Expenses	1,014,000
	Fixed Manufacturing	1,016,600
	Less: Total Fixed Sales and Administrative Expenses	2,030,600
	Net Operating Income	111,800
c.)	Reconciliation
	Net Income under Variable Costing	111,800
	Add: Fixed Manufacturing Overhead Deferred	203,320	(400,920 - 197,600 )
	Net Income under Absorption	315,120