Question

During the first month of operations ended July 31, YoSan Inc. manufactured 8,600 flat panel televisions, of which 8,100 were sold. Operating data for the month are summarized as follows:

Sales		$1,012,500
Manufacturing costs:
Direct materials	$507,400
Direct labor	154,800
Variable manufacturing cost	129,000
Fixed manufacturing cost	68,800	860,000
Selling and administrative expenses:
Variable	$81,000
Fixed	37,300	118,300

Required:

1. Prepare an income statement based on the absorption costing concept.

YoSan Inc.
Absorption Costing Income Statement
For the Month Ended July 31
		$
Cost of goods sold:
	$
		$
		$

2. Prepare an income statement based on the variable costing concept.

YoSan Inc.
Variable Costing Income Statement
For the Month Ended July 31
		$
Variable cost of goods sold:
	$
		$
		$
Fixed costs:
	$
		$

3. Explain the reason for the difference in the amount of income from operations reported in (1) and (2).

The income from operations reported under   costing exceeds the income from operations reported under  costing by the difference between the two, due to   manufacturing costs that are deferred to a future month under   costing.

Answer 1

YoSan Inc.
Absorption Costing Income Statement
For the Month Ended July 31
Sales		$1,012,500
Cost of goods Sold:
Cost of Goods Manufactured      [$507,400 + $154,800 + $129,000 + $68,800]	$860,000
Inventory, July 31                       [Refer working note 1]	($50,000)
Total cost of goods sold		$810,000
Gross Margin                               [Sales - Total cost of goods sold]		$202,500
Selling and administrativeExpense		$118,300
Income from operations              [$202,500 - $118,300]		$84,200

.

.

YoSan Inc.
Variable Costing Income Statement
For the Month Ended July 31
Sales		$1,012,500
Variable cost of goods sold:
Variable cost of goods manufactured            [Refer working note 2]	$791,200
Inventory, July 31                                         [Refer working note 3]	($46,000)
Variable cost of goods sold		$745,200
Manufacturing Margin                                           [Sales - Variable cost of goods sold]		$267,300
Variable selling and administrative expenses		$81,000
Contribution Margin                                             [$267,300 - $81,000]		$186,300
Fixed costs:
Fixed manufacturing costs	$68,800
Fixed selling and Administrative Expenses	$37,300
Total fixed costs		$106,100
Income from operations                                      [$186,300 - $106,300]		$80,200

.

.

3. The Income from operations reported under absorption costing exceeds the income from operations reported under variable costing by the difference between the two, due to fixed manufacturing costs that are deferred to a future month under absorption costing.

.

.

Working note 1 - Computation of value of ending inventory at July 31 under absorption costing
Direct material cost	$507,400
Add: Direct labor cost	$154,800
Add: Variable manufacturing overhead	$129,000
Add: Fixed manufacturing cost	$68,800
Total cost of production                                                                                                      (a)	$860,000
Number of units produced                                                                                                     (b)	$8,600
Cost per unit                                                                                                                          (c = a / b)	$100
Number of units in ending inventory    [Production - Sales = 8,600 units - 8,100 units]     (d)	500
Value of ending inventory                                                                                                    (c x d)	$50,000

.

.

Working note 2 - Computation of value of variable cost of goods manufactured
Direct material cost	$507,400
Add: Direct labor cost	$154,800
Add: Variable manufacturing overhead	$129,000
Variable cost of goods manufactured	$791,200

.

.

Working note 3 - Computation of value of ending inventory on July 31 under variable costing
Direct material cost	$507,400
Add: Direct labor cost	$154,800
Add: Variable manufacturing overhead	$129,000
Variable cost of production                                                                                                 (a)	$791,200
Number of units produced                                                                                                     (b)	$8,600
Cost per unit                                                                                                                          (c = a / b)	$92
Number of units in ending inventory    [Production - Sales = 8,600 units - 8,100 units]     (d)	500
Value of ending inventory                                                                                                    (c x d)	$46,000

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