Question

PROBLEMS 1. Rosotti Corporation began operations on January 1, 2005. Cost and sales information for 2005 is summarized below. Total costs of operations: Direct materials $60 per unit Direct labor $90 per unit Variable factory overhead $40 per unit Variable selling expenses $11 per unit Variable administrative expenses $10 per unit Sales price $400 per unit Fixed factory overhead costs $1,200,000 Fixed selling expenses $11,900,000 Fixed administrative expenses $12,100,000 Units produced 300,000 Units sold 250,000 Units in ending inventory 50,000 Tax rate 40% Required: a. Prepare an income statement for 2005 for the company under absorption costing. b. Prepare an income statement for 2005 for the company under variable costing. Hint: The income tax expense can only be calculated correctly under the full-absorption method. Use the same amount of income tax expense on both income statements.

Answer 1

SOLUTION:

ABSORPTION COSTING INCOME STATEMENT
Sales (300,000 * $400)			120,000,000
Cost of goods sold
Cost of goods manufactured		58,200,000
Variable cost (300,000 * 40)	12,000,000
Fixed cost
Direct material (300,000 * $60)	18,000,000
Direct labor	27,000,000
Fixed factory overhead	1,200,000
Less: Inventory		9,700,000
(58,200,000 / 300,000 = 194 per unit); 194 * 50,000
Cost of goods sold			48,500,000
Gross profits			71,500,000
Selling and administrative expenses
Variable cost (300,000 * (10+11))	6,300,000
Fixed cost (11,900,000 + 12,100,000)	24,000,000		30,300,000
Income from operation			41,200,000
VARIABLE COSTING INCOME STATEMENT
Sales (300,000 * $400)			120,000,000
Variable cost of goods sold		57,000,000
Direct material ( $60 per unit)	18,000,000
Direct labor ($90 per unit)	27,000,000
Variable factory overhead ($40 per unit)	12,000,000
Less: Ending inventory (50,00*$190 per unit)		9,500,000	47,500,000
Manufacturing margin			72,500,000
Selling and administrative expenses
Variable cost (300,000 * (10+11))			6,300,000
Contribution margin			66,200,000
Fixed costs:
Fixed manufacturing costs (300,000 * $150	45,000,000
Fixed Selling and administrative expenses	24,000,000		69,000,000
Income/Loss from operations			-2,800,000