Question

a) Prepare both an Absorption & Variable Costing Income Statement, given the following: (Provide computations or excel attachment)

Total units= 85,000 kg

Consumer Price (including VAT): 148.20, Value Added Tax (25% of consumer price before tax): 29.64, Consumer Price before tax: 118.56, Retailer's Margin (27.5% of price to retailer): 25.57, UNIT PRICE to Retailer: 92.99

Cake Material: 10.67, Cake Labor: 10.25, Toppings Material: 5.55, Toppings Labor: Cabbage: 5.45, Packaging: 10.26, Transportation & Storage: 6.20, Margins & Discounts to Wholesalers (8% of price to retailer): 7.44, Sundry other variable costs: 8.10, Production Fixed Expenses ($10 per kilogram): 10.00, Advertising Expenses: 3.30, SG&A Expenses (4% of price to retailer): 3.72

Total Unit Cost: 80.94 , Margin per Unit: 12.05

b) Explain why Net income is different.

Answer 1

a) Soluation:-

Computation of Absorbtion and Variable Costing Income Statement:-

Total no. of units = 85,000 kg

Absorbtion and Variable Costing Income Statement:-

Paricular	no. of units	cost per unit	Absorbiton Costing statement	cost per unit	Varibale Costing statement
Sales(A)	85,000 kg	92.99	$7904150	92.99	$7904150
Cake Material Cake Labor	85,000 kg 85,000 kg	10.67 10.25	906950 871250	10.67 10.25	906950 871250
Prime Cost Toppings Material Toppings Labor Cabbage Sundry other variable cost Fixed production exp	85,000 kg 85,000 kg 85,000 kg 85,000 kg 85,000 kg	20.92 5.55 5.45 8.10 10	1778200 471750 463250 688500 850000	20.92 5.55 5.45 8.10 -	1778200 471750 463250 688500 -
Production cost Packaging Transportation & Storage Margins & Discounts to Wholesalers (8% of price to retailer) Advertising Expenses SG&A Expenses (4% of price to retailer)	85,000 kg 85,000 kg 85,000 kg 85,000 kg 85,000 kg 85,000 kg	50.02 10.26 6.20 7.44 3.30 3.72	4251700 872100 527000 632400 280500 316200	40.02 10.26 6.20 7.44 3.30 3.72	3401700 872100 527000 632400 280500 316200
Cost of goods sold(B)	85000kg	80.94	$6879900	70.94	$6029900
Net income(C=A-B)	85000 kg	12.05	$1024250	22.05	$1874250

b)Soluation:

Reason for difference in Net Income:-

Here Absorption costing including all the costs associated with the manufacturing of product, while variable costing only includes the variable costs directly incurred in production but not any of fixed cost. so main reason for difference in net income in the above problem is fixed cost amount i.e. $ 8,50,000/- is not considere in the Variable Costing financial Statement.