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Estimated Income Statements, using Absorption and Variable Costing Prior to the first month of operations ending...

Estimated Income Statements, using Absorption and Variable Costing

Prior to the first month of operations ending October 31 Marshall Inc. estimated the following operating results:

Sales (26,400 x $93) $2,455,200
Manufacturing costs (26,400 units):
Direct materials 1,483,680
Direct labor 351,120
Variable factory overhead 163,680
Fixed factory overhead 195,360
Fixed selling and administrative expenses 53,100
Variable selling and administrative expenses 64,300

The company is evaluating a proposal to manufacture 29,600 units instead of 26,400 units, thus creating an Inventory, October 31 of 3,200 units. Manufacturing the additional units will not change sales, unit variable factory overhead costs, total fixed factory overhead cost, or total selling and administrative expenses.

a. 1. Prepare an estimated income statement, comparing operating results if 26,400 and 29,600 units are manufactured in the absorption costing format. If an amount box does not require an entry leave it blank or enter “0”.

Marshall Inc.
Absorption Costing Income Statement
For the Month Ending October 31
26,400 Units Manufactured 29,600 Units Manufactured
$ $
Cost of goods sold:
$ $
$ $
$ $
Income from operations $ $

a. 2. Prepare an estimated income statement, comparing operating results if 26,400 and 29,600 units are manufactured in the variable costing format. If an amount box does not require an entry leave it blank or enter “0”.

Marshall Inc.
Variable Costing Income Statement
For the Month Ending October 31
26,400 Units Manufactured 29,600 Units Manufactured
$ $
Variable cost of goods sold:
$ $
$ $
$ $
$ $
Fixed costs:
$ $
Total fixed costs $ $
$ $

b. What is the reason for the difference in income from operations reported for the two levels of production by the absorption costing income statement?

The increase in income from operations under absorption costing is caused by the allocation of   overhead cost over a   number of units. Thus, the cost of goods sold is  . The difference can also be explained by the amount of   overhead cost included in the   inventory.

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