Question

Income Statements under Absorption and Variable Costing

The Duller Edge Inc. assembles and sells MP3 players. The company began operations on May 1, 2016, and operated at 100% of capacity during the first month. The following data summarize the results for May:

Sales (14,500 units) $2,030,000

Production costs (19,000 units):

Direct materials $984,200

Direct labor 473,100

Variable factory overhead 235,600

Fixed factory overhead 157,700 1,850,600

Selling and administrative expenses:

Variable selling and administrative expenses $286,800

Fixed selling and administrative expenses 111,000 397,800

If required, round interim per-unit calculations to the nearest cent.

a. Prepare an income statement according to the absorption costing concept.

The Duller Edge Inc.

Absorption Costing Income Statement

For the Month Ended May 31, 2016

Sales

$

Cost of goods sold

Gross profit

$

Selling and administrative expenses

Income from operations

$

Feedback

a. Under absorption costing, the cost of goods manufactured includes direct materials, direct labor, and factory overhead costs. Both fixed and variable factory costs are included as part of factory overhead.

Learning Objective 1.

b. Prepare an income statement according to the variable costing concept.

The Duller Edge Inc.

Variable Costing Income Statement

For the Month Ended May 31, 2016

Sales

$

Variable cost of goods sold

Manufacturing margin

$

Variable selling and administrative expenses

Contribution margin

$

Fixed costs:

Fixed factory overhead

$

Fixed selling and administrative expenses

Income from operations

$

Answer 1

Solution:

(a)

Duller Edge Inc.
Absorption Costing Income Statement
For the Month Ended May 31, 2016
Sales		$2,030,000
Cost of goods sold:
Cost of goods manufactured	1,850,600
Less: Closing inventory ( 4500 X $ 97.4)	(438,300)
Cost of goods sold		$ 1,412,300
Gross profit		$617,700
Selling and administrative expenses		$397,800
Income from operations		$219,900

Working Note:

Cost of goods manufactured

= Direct materials + Direct labor + Variable factory overhead + Fixed factory overhead

=$984,200 + 473,100 + 235,600 + 157,700

=$ 1,850,600

Per unit cost of goods manufactured =$ 1,850,600 / 19,000 units = $ 97.4

Note: Under absorption costing fixed and variable cost is a part of product cost.

(b)

Duller Edge Inc.
Variable Costing Income Statement
For the Month Ended May 31, 2016
Sales(38,500 X $80)		$2,030,000
Variable cost of goods sold: $ 1,692,900 Less: Closing inventory ( 4500 X $ 89.1):$ 400,950	$ 1,291,950
Manufacturing margin		$738,050
Variable selling and administrative expenses		$286,800
Contribution margin		$451,250
Fixed costs:
Fixed manufacturing costs	157,700
Fixed selling and administrative expenses	111,000	268,700
Income from operations		$182,550

Note: Under variable costing only variable cost is a part of product cost.

Variable Cost of goods manufactured

= Direct materials + Direct labor + Variable factory overhead +

=$984,200 + 473,100 + 235,600

=$ 1,692,900

Per unit variable cost of goods manufactured

=$ 1,692,900/ 19,000 units = $ 89.1