Question

Exercise 19-3 Income reporting under absorption costing and variable costing LO P2

Sims Company, a manufacturer of tablet computers, began operations on January 1, 2017. Its cost and sales information for this year follows.

Manufacturing costs
Direct materials	$	35	per unit
Direct labor	$	55	per unit
Overhead costs for the year
Variable overhead	$	3,000,000
Fixed overhead	$	7,000,000
Selling and administrative costs for the year
Variable	$	750,000
Fixed	$	4,250,000
Production and sales for the year
Units produced		100,000	units
Units sold		70,000	units
Sales price per unit	$	360	per unit

1. Prepare an income statement for the year using variable costing.
2. Prepare an income statement for the year using absorption costing.
3. Under what circumstance(s) is reported income identical under both absorption costing and variable costing?

Attention: I have this question incorrect on the problem.

Hi. It says that answer for required 1: Variable overhead: 3,000,000 is incorrect. Sales is also incorrect. Contribution margin: 15,150,000 is incorrect. And last Net income (loss): 3,900,000 is also incorrect.

Also answer for requited 2: Variable overhead costs is incorrect: 3,000,000. Fixed overhead costs: 4,900.000 is incorrect. Gross margin: 11,000,000. And last Net income (loss): 6,000,000 is also incorrect.

Answer 1

1. Prepare an income statement for the year using variable costing

SIMS COMPANY
Variable Costing Income Statement
Sales		25200000
Less: Variable costs
Direct materials	2450000
Direct labor	3850000
Variable overhead costs	2100000
Variable selling and administrative expenses	750000
Total variable costs		9150000
Contribution margin		16050000
Less: Fixed expenses
Fixed selling and administrative costs	4250000
Fixed overhead costs	7000000
Total fixed expenses		11250000
Net income (loss)		4800000

2. Prepare an income statement for the year using absorption costing.

SIMS COMPANY
Absorption Costing Income Statement
Sales		25200000
Less: Cost of goods sold
Direct materials	2450000
Direct labor	3850000
Variable overhead costs	2100000
Fixed overhead costs	4900000
Cost of goods sold		13300000
Gross margin		11900000
Selling general and administrative expenses
Fixed selling and administrative costs	4250000
Variable selling and administrative expenses	750000
Total selling, general and administrative expenses		5000000
Net income (loss)		6900000

3. Under what circumstance(s) is reported income identical under both absorption costing and variable costing?

ANSWER = Production equals sales and there is no beginning finished goods inventory