Question

Absorption and Variable Costing Income Statements: Production Exceeds Sales

Glendale Company sells its product at a unit price of $12.00. Unit manufacturing costs are direct materials, $2.00; direct labor, $3.00; and variable manufacturing overhead, $1.50. Total fixed manufacturing costs are $25,000 per year. Selling and administrative expenses are $1.00 per unit variable and $14,000 per year fixed. Though 25,000 units were produced during 2009, only 17,000 units were sold. There was no beginning inventory.

(a) Prepare a functional income statement using absorption costing. (Do not use negative numbers with your answers.)

Glendale Company Functional (Absorption Costing) Income Statement For the year 2009
Sales		$Answer
Cost of goods sold		Answer
Gross profit		Answer
Other expenses:
Variable selling and administrative	$Answer
Fixed selling and administrative	Answer	Answer
Net income		$Answer

(b) Prepare a contribution income statement using variable costing. (Do not use negative numbers with your answers.)

Glendale Company Contribution (Variable Costing) Income Statement For the year 2009
Sales		$Answer
Variable expenses:
Cost of goods sold	$Answer
Selling and administrative	Answer	Answer
Contribution margin		Answer
Fixed expenses:
Manufacturing overhead	Answer
Selling and administrative	Answer	Answer
Net income		$Answer

Answer 1

(a) Functional ( Absorption costing ) income statement :

Sales [ 17000*12 ]		204000
Cost of goods sold		127500
Gross profit		76500
Other expenses:
Variable selling and administrative [ 17000*1 ]	17000
Fixed selling and administrative	14000	31000
Net income		45500

Working note
1) Calculation of cost of goods sold
Direct material [ 25000*2]	50000
Direct labor [ 25000*3]	75000
Variable manufacturing overhead [ 25000*1.5 ]	37500
Total fixed manufacturing cost	25000
Cost of goods manufactured	187500
(+)Beginning finished goods inventory	0
(-) Ending finished goods inventory [ 187500 * 8000 / 25000 ]	60000
Cost of goods sold	127500

(b) Contribution ( variable costing ) income statement :

Sales [ 17000*12 ]		204000
Variable expenses:
Cost of goods sold [ (2+3+1.5) * 17000 ]	110500
Selling and administrative [ 17000*1 ]	17000	127500
Contribution margin		76500
Fixed expenses:
Manufacturing overhead	25000
Selling and administrative	14000	39000
Net income		37500