Question

Given the following information:

	Prior Year (Budget)	Prior Year (Actual)	Current Year (Budget)	Current Year (Actual)
Beginning Inventory (Units)	0	0	?	?
Sales (Units)	600,000	580,000	575,000	570,000
Manufactured (Units)	600,000	590,000	640,000	610,000
Selling Price ($/unit)	9.99	9.90	9.95	10.00
Variable Manufacturing Cost ($/unit)	4.92	4.90	5.00	4.95
Total Fixed Manufacturing Costs ($)	1,584,000	1,561,000	1,625,000	1,599,531
Variable Selling Cost ($/unit)	1.00	1.01	0.99	1.00
Total Fixed SG&A Costs ($)	350,000	353,000	352,850	348,000

Other information:

• The manufacturer uses FIFO
• The manufacturer uses Standard Costing

Required:

1. Prepare an income statement for the Current Year based on Variable Costing.

2. Prepare an income statement for the Current Year based on Absorption Costing.

3. Reconcile the difference in Net Income between Variable Costing and Absorption Costing for the current year by comparing this difference in income to the differences in ending inventory for Absorption Costing and Variable Costing.

Answer 1

Given :

Actual unit sold in the prior year = 58000

Actual units manufactured in the prior year = 590000

Therefore, ending inventory during the prior period = 590000-580000 =10000

The ending inventory of the prior period will be the beginning inventory for the current period.

Therefore, beginning inventory for the current period = 10000

                                                                     Current year           current year

                                                                        budget                   actual

Beginning Inventory (Units)	?	10000
Sales (Units)	575,000	570,000
Manufactured (Units)	640,000	610,000
Selling Price ($/unit)	9.95	10.00
Variable Manufacturing Cost ($/unit)	5.00	4.95
Total Fixed Manufacturing Costs ($)	1,625,000	1,599,531
Variable Selling Cost ($/unit)	0.99	1.00
Total Fixed SG&A Costs ($)	352,850	348,000

1.) income statement for the Current Year based on Variable Costing:

particulars	amount	amount
Sales		5700000
Less Variable cost of goods sold
Opening inventory (10000x4.9)	49000
(+) VC of goods manufactured	3019500
VC of goods available for sale	3068500
(-)closing inventory (50000x4.95)	247500
Gross contribution margin		2821000
(-) variable selling cost	570000
Contribution margin		2251000
Less: period expenses
Fixed manufacturing expense	1599531
Fixed SG and A cost	348000	1947531
Net operating income		303469

income statement for the Current Year based on Absorption Costing.

particulars	amount	Amount
sales		5700000
Less cost of goods sold:
Opening inventory	75500
+ COGM	4619031
Cost of goods available for sale	4694531
- Closing inventory	378500	4316031
Gross profit		1383969
Less selling expenses
variable	570000
fixed	348000
Net operating income		465969

net income using absorption costing is greater than using variable costing by 162500 (465969-303469).

also, ending inventory using absorption costing is 378500 and using variable costing is 247500. this is because fixed manucaturing expense is added to ending inventory in absorption costing.