Question

Income Statements under Absorption Costing and Variable Costing

Joplin Industries Inc. manufactures and sells high-quality sporting goods equipment under its highly recognizable J-Sports logo. The company began operations on May 1 and operated at 100% of capacity (55,000 units) during the first month, creating an ending inventory of 5,000 units. During June, the company produced 50,000 garments during the month but sold 55,000 units at $90 per unit. The June manufacturing costs and selling and administrative expenses were as follows:

	Number of Units		Unit Cost		Total Cost
Manufacturing costs in June 1 beginning inventory:
Variable	5,000		$36.00		$180,000
Fixed	5,000		14.00		70,000
Total			$50.00		$250,000
Manufacturing costs in June:
Variable	50,000		$36.00		$1,800,000
Fixed	50,000		15.40		770,000
Total			$51.40		$2,570,000
Selling and administrative expenses in June:
Variable	55,000		18.20		$1,001,000
Fixed	55,000		7.00		385,000
Total			25.20		$1,386,000

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

Joplin Industries Inc.
Absorption Costing Income Statement
For the Month Ended June 30
Sales		$
Cost of goods sold:
Beginning inventory	$
Cost of goods manufactured
Total cost of goods sold
		$
		$

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

Joplin Industries Inc.
Variable Costing Income Statement
For the Month Ended June 30
		$
		$
		$
Fixed costs:
	$
		$

c. What is the reason for the difference in the amount of income from operations reported in (a) and (b)?

Under the method, the fixed manufacturing cost included in the cost of goods sold is matched with the revenues. Under , all of the fixed manufacturing cost is deducted in the period in which it is incurred, regardless of the amount of inventory change. Thus, when inventory decreases, the income statement will have a lower income from operations.

Answer 1