Question

Yale Company manufactures hair brushes that sell at wholesale for $3 per unit. The company had no beginning inventory in the prior year. These data summarize the current and prior year operations:

	Prior Year			Current Year
Sales		2,300	units		3,700	units
Production		3,000	units		3,000	units
Production cost
Factory—variable (per unit)	$	0.60		$	0.60
—fixed	$	1,500		$	1,500
Marketing—variable	$	0.40		$	0.40
Administrative—fixed	$	500		$	500

Required:

1. Prepare an income statement for each year based on full costing.

2. Prepare an income statement for each year based on variable costing.

3. Prepare a reconciliation of the difference each year in the operating income resulting from using the full costing method and variable costing method.

Answer 1

SOLUTION:

1	In absorption costing method, the unit product cost is the sum of all manufacturing costs per unit
	whether it is fixed or variable.
	Unit product cost under Full Costing:
	Variable Overhead per unit	$0.60
	Fixed overhead per unit   ($1,500 / 3000)	$0.50
	Product Cost per unit	$1.10
	*Fixed overhead per unit = Fixed overhead / Units produced
	YALE COMPANY
	Full costing
	Income Statement
	PARTICULARS	Prior Year		Current Year
	Sales		$6,900		$11,100
	Less: Cost of goods sold
	Opening inventory	$0		$770
	Add: Cost of goods produced	$3,300		$3,300
	Cost of goods available for sale	$3,300		$4,070
	Less: Ending inventory	($770)		$0
	Cost of goods sold (total)		$2,530		$4,070
	Gross margin		$4,370		$7,030
	Selling & Administrative expenses:
	Fixed	$500		$500
	Variable	$920		$1,480
	Total Selling and administrative expenses		$1,420		$1,980
	Net Income		$2,950		$5,050
	*Calculations :
	Beginning inventory for Prior year = 0
	Ending inventory units for prior year = Production - Sales
	3,000 - 2,300 = 700 units
	Cost of ending inventory = Ending inventory units * Unit product cost = (700 * $1.1) = $770.
	Beginning inventory for Current year = Ending inventory for prior year = 700 units   ($770)
	Ending inventory units for current year = Beginning inventory units + Units produced - Units sold
	700 + 3,000 - 3,700 = 0 units
	*Sales = Units sold * Unit selling price
	Prior Year   (2,300 * $3) = $6,900
	Prior Year   (3,700 * $3) = $11,100
	*Cost of goods produced = Units produced * Unit product cost
	Prior Year   (3,000 * $1.1) = $3,300
	Current year (3,000 * $1.1) = $3,300
	*Variable selling and administrative cost = Variable marketing cost per unit * Units sold
	Prior Year   (2,300 * $0.40) = $920
	Current year (3,700 * $0.40) = $1,480
2	In variable costing method, the unit product cost is the sum of only variable
	manufacturing costs per unit
	Unit product cost under Variable Costing:
	Variable Overhead per unit	$0.60
	Total production cost per unit	$0.60
	YALE COMPANY
	Variable Costing
	Income Statement
	PARTICULARS	Prior Year		Current Year
	Sales		$6,900		$11,100
	Less: Variable cost of goods sold:
	Opening inventory	$0		$420
	Add: Cost of goods produced	$1,800		$1,800
	Variable cost of goods available for sale	$1,800		$2,220
	Less: Ending inventory	-$420		$0
	Variable cost of goods sold		$1,380		$2,220
	Gross Contribution Margin		$5,520		$8,880
	Less: Variable Selling and Adm. Exp.		$920		$1,480
	Contribution Margin		$4,600		$7,400
	Less: Fixed expenses:
	Fixed manufacturing overhead	$1,500		$1,500
	Fixed selling and adm. expenses	$500	$2,000	$500	$2,000
	Net operating income		$2,600		$5,400
	*Cost of goods produced = Units produced * Unit product cost
	Prior Year   (3,000 * $0.60) = $1,800
	Current year (3,000 * $0.60) = $1,800
	Cost of ending inventory = Ending inventory units * Unit product cost
	Prior year    (700 * $0.60) = $420
	Current   year    ( 0 * $0.60) = $0.
	*Variable selling and administrative cost = Variable marketing cost per unit * Units sold
	Prior Year   (2,300 * $0.40) = $920
	Current year (3,700 * $0.40) = $1,480
3	Prior Year:
	Variable costing net income		$2,600
	Add: Ending inventory at fixed overhead per unit (700 * $0.50)	$350
	Absorption costing net income		$2,950
	Current Year :
	Variable costing net income		$5,400
	Less: Beginning inventory		($350)
	Absorption costing net income		$5,050