Question

Prepare an absorption and variable income statement and prove the
difference between the two statements
Units in beginning inventory			0	Units sold	35,000
Units produced			40,000	Ending inventory	5,000
Variable cost per unit			Fixed costs
Direct materials		5	Fixed overhead	$160,000
Direct labor		6	Fixed selling	$210,000
Variable OH		1
Variable selling exp		2	Sales price	$40

Answer 1

Absorption Costing Income Statement
Sales (35,000 x 40)		$1,400,000
Cost of goods sold:
Direct materials (40,000 x 5)	200,000
Direct labor ( 40,000 x 6)	240,000
Variable manufacturing overhead (40,000 x 1)	40,000
Fixed manufacturing overhead	160,000
Cost of goods manufactured	640,000
Ending inventory (640,000 x 5,000/40,000)	-80,000
Cost of goods sold		-560,000
Gross margin		$840,000
Operating expenses:
Variable selling expenses (35,000 x 2)	70,000
Fixed selling expenses	210,000
Total operating expense		-280,000
Net Income		$560,000

Contribution Approach Income Statement
Sales (35,000 x 40)		$1,400,000
Less: Variable expense:
Direct materials (35,000 x 5)	175,000
Direct labor ( 35,000 x 6)	210,000
Variable manufacturing overhead (35,000 x 1)	35,000
Variable selling expenses (35,000 x 2)	70,000
Total Variable expenses		-490,000
Contribution margin		$910,000
Less: Fixed expense:
Fixed overhead	160,000
Fixed selling expenses	210,000
Total fixed expenses		-370,000
Net Income		$540,000

Fixed manufacturing overhead = $160,000

Number of units produced = 40,000

Fixed manufacturing overhead per unit = Fixed manufacturing overhead / Number of units produced

= 160,000/40,000

= $4

Ending inventory = 5,000 units

Fixed manufacturing overhead included in ending inventory = Ending inventory x Fixed manufacturing overhead per unit

= 5,000 x 4

= $20,000

Net income as per absorption costing = $560,000

Net income as per contribution margin costing = $540,000

Difference between the two profits ($20,0000 is caused by fixed manufacturing overhead included in ending inventory.