Question

Genco Inc. makes a single product that sells for P50. The standard variable manufacturing cost is P32.50 and the standard fixed manufacturing cost is P7.50, based on producing 20,000 units. During the year Genco produced 22,000 units and sold 21,000 units. Actual fixed manufacturing costs were P157,000; actual variable manufacturing costs were P735,000. Selling and administrative expenses, all fixed, were P75,000. There were no beginning inventories.

   a. What is the net income under the standard absorption costing income statement?
   b. What is the net income under the standard variable costing income statement?

Answer 1

a)	Standard absorption Costing Income Statement
	Particular	Amount($)	Amount($)	Amount($)
	Sales (21000 * $ 50)			1050000
	Less : Cost of goods sold (21000 * 40)		840000
	variances :
	Variable Spending	20000 Unfavourable
	Fixed Spending	7000 Unfavourable
	Volume	(15000) favourable	12000
	Adjusted Cost of Goods Sold			852000
	Gross Profit			198000
	less :Selling and administrative			75000
	Net Income			123000

working :

Variable variance = (no. of unit produced * Standard variable manufacturing cost) - Actual manufacturing variable cost

Variable variance = (22000*32.5) - 735000 = 20000 unfavourable

Fixed variance = ( fixed producing no. of units * standard fixed manufacturing cost ) - actual fixed manufacturing cost

Fixed variance = (20000*7.5) - 157000 = 7000 Unfavourable

Volume variance = (22000-2000)*7.5 = 15000 favourable

b)	Standard variable costing Income statement
	Particular	Amount($)	Amount($)
	sales		1050000
	less : variable costs (21000 * 32.5)	682500
	Variable Spending variance	20000 Unfavourable
	Adjusted variable cost of goods sold		702500
	Contribution margin		347500
	less :Fixed costs
	Manufacturing	157000
	Selling and administrative	75000	232000
	Net Income		115500