Question

Cloverton Glass Company makes stained glass lamps. Each lamp that it sells for $128 requires $20 of direct materials and $32 of direct labor. Fixed overhead costs are expected to be $72,000 per year. Cloverton Glass expects to sell 1,000 lamps during the coming year. Selling and administrative expenses were zero. Required: Prepare income statements using absorption costing, assuming that Cloverton Glass makes 1,000, 1,250, and 1,500 lamps during the year. Prepare income statements using variable costing, assuming that Cloverton Glass makes 1,000, 1,250, and 1,500 lamps during the year.

Answer 1

• All working forms part of the answer
• While preparing or using Absorption costing method, Fixed manufacturing overhead are allocated to units sold and become cost of the product.
• Working #1: For Absorption Costing:

A	Fixed Overheads	$                         72,000.00	$                                       72,000.00	$         72,000.00
B	Units produced	1,000	1,250	1,500
C = A/B	Manufacturing overhead per unit produced	$                                 72.00	$                                               57.60	$                 48.00
D	Direct material cost per unit	$                                 20.00	$                                               20.00	$                 20.00
E	Direct labor cost per unit	$                                 32.00	$                                               32.00	$                 32.00
F = C+D+E	Total cost per unit	$                               124.00	$                                             109.60	$               100.00
G	Units Sold	1,000	1,000	1,000
H = FxG	Cost of Goods Sold	$                      124,000.00	$                                     109,600.00	$       100,000.00

• Income Statements: Absorption Costing Method

Working	Units produced	1,000	1,250	1,500
A	Units Sold	1,000	1,000	1,000
	Income Statement - Absorption Costing
B = A x $128	Sales Revenue	$                      128,000.00	$                                     128,000.00	$       128,000.00
C (Calculated in Working #1)	Cost of Goods Sold	$                      124,000.00	$                                     109,600.00	$       100,000.00
D = B - C	Gross Profits	$                           4,000.00	$                                       18,400.00	$         28,000.00
E	Operating Expenses	$                                        -	$                                                      -	$                        -
F = D - E	Net Income	$                           4,000.00	$                                       18,400.00	$         28,000.00

• While using Variable costing, Total Fixed overheads are considered, irrespective of the fact how many units were produced or sold. Fixed Cost does not become part of the product cost.
• Income Statements: Variable Costing [same for all the 3 cases, as no. of units sold in each case is same]

	Units produced	1,000	1,250	1,500
A	Units Sold	1,000	1,000	1,000
	Income Statement - Variable Costing
B = A x $128	Sales revenue	$                     128,000.00	$                                     128,000.00	$       128,000.00
	Variable costs:
C = A x $20	Direct Material	$                         20,000.00	$                                       20,000.00	$         20,000.00
D= A x $32	Direct Labor	$                         32,000.00	$                                       32,000.00	$         32,000.00
E = C + D	Total Variable costs	$                         52,000.00	$                                       52,000.00	$         52,000.00
F = B - E	Contribution Margin	$                         76,000.00	$                                       76,000.00	$         76,000.00
G	Fixed Expenses	$                         72,000.00	$                                       72,000.00	$         72,000.00
H = F - G	Net Income	$                           4,000.00	$                                         4,000.00	$           4,000.00