Question

Bionic Cotton Inc. manufactures and sells high-quality sporting goods equipment under its highly recognizable Cool Cat logo. The company began operations on January 1, 2016, and operated at 100% of capacity (84,000 units) during the first month, creating an ending inventory of 7,000 units. During February, the company produced 76,600 garments during the month but sold 83,600 units at $106 per unit. The February manufacturing costs and selling and administrative expenses were as follows:

			Number of Units	Unit Cost	Total Cost
Manufacturing costs in February beginning inventory:
Variable			7,000	$50	$ 350,000
Fixed			7,000	10	70,000
Total				$60	$420,000
February manufacturing costs:
Variable			76,600	$50	$ 3,830,000
Fixed			76,600	12	919,200
Total				$62	$4,749,200
Selling and administrative expenses:
Variable					$ 1,370,000
Fixed					320,000
Total					$1,690,000

	Required:
A.	Prepare an income statement according to the absorption costing concept for February.*
B.	Prepare an income statement according to the variable costing concept for February.*
C.	What is the reason for the difference in the amount of income from operations reported in (A) and (B)? * Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries. Be sure to complete the statement heading. A colon (:) will automatically appear if it is required. If a net loss is incurred, enter that amount as a negative number using a minus sign. LABELS: Labels February 29, 2016 Fixed costs For the Month Ended February 29, 2016 Amount Descriptions Beginning inventory Contribution margin Contribution margin ratio Cost of goods manufactured Cost of goods sold Fixed manufacturing costs Fixed selling and administrative expenses Gross profit Income from operations Loss from operations Manufacturing margin Planned contribution margin Sales Sales mix Selling and administrative expenses Variable cost of goods sold Variable selling and administrative expenses A. Prepare an income statement according to the absorption costing concept for February. Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries. Be sure to complete the statement heading. A colon (:) will automatically appear if it is required. If a net loss is incurred, enter that amount as a negative number using a minus sign. Bionic Cotton Inc. Absorption Costing Income Statement 1 2 Cost of goods sold: 3 4 5 6 7 8 B. Prepare an income statement according to the variable costing concept for February. Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries. Be sure to complete the statement heading. A colon (:) will automatically appear if it is required. If a net loss is incurred, enter that amount as a negative number using a minus sign. Bionic Cotton Inc Variable Costing Income Statement 1 2 3 4 5 6 7 8 9

Answer 1

Solution A:

Bitonic Cotton Inc.
Absorption Costing Income Statement
For the month ended February 29, 2016
Particulars		Amount
Sales		$8,861,600.00
Cost of goods sold:
Beginning inventory	$420,000.00
Add: Cost of goods manufactured	$4,749,200.00
Less: Ending inventory	$0.00
Cost of goods sold		$5,169,200.00
Gross Profit		$3,692,400.00
Selling and administrative expenses		$1,690,000.00
Net Operating income		$2,002,400.00

Solution B:

Bitonic Cotton Inc.
Variable Costing Income Statement
For the month ended February 29, 2016
Particulars		Amount
Sales		$8,861,600.00
Variable Cost:
Variable cost of goods sold	$4,180,000.00
Variable selling and administrative expenses	$1,370,000.00
Total variable costs		$5,550,000.00
Fixed costs:		$3,311,600.00
Fixed manufacturing cost	$919,200.00
Fixed selling and administrative expenses	$320,000.00
Total fixed costs		$1,239,200.00
Net Operating income		$2,072,400.00

Solution C:

The reason for the difference in the amount of income from operations reported in A and B is because of fixed manufacturing overhead available in beginning inventory of $70,000. As this fixed overhead is expensed in variable costing in january, therefore variable costing income statement of february is higher than absorption costing income statement.