In: Accounting
Income Statements and Firm Performance: Variable and Absorption Costing
Jellison Company had the following operating data for its first two years of operations:
Variable costs per unit: | |||
Direct materials | 4.00 | ||
Direct labor | $2.80 | ||
Variable overhead | 1.50 | ||
Fixed costs per year: | |||
Overhead | 180,000 | ||
Selling and administrative | 70,600 |
Jellison produced 90,000 units in the first year and sold 80,000. In the second year, it produced 80,000 units and sold 90,000 units. The selling price per unit each year was $12. Jellison uses an actual costing system for product costing.
Required:
1. Prepare income statements for both years using absorption costing. If an amount is zero, enter "0".
Jellison Company | ||
Absorption-Costing Income Statement | ||
For Years 1 and 2 | ||
Year 1 | Year 2 | |
Sales | $fill in the blank a78332ffd05f079_2 | $fill in the blank a78332ffd05f079_3 |
Less: Cost of goods sold | fill in the blank a78332ffd05f079_5 | fill in the blank a78332ffd05f079_6 |
Gross profit | $fill in the blank a78332ffd05f079_7 | $fill in the blank a78332ffd05f079_8 |
fill in the blank a78332ffd05f079_10 | fill in the blank a78332ffd05f079_11 | |
Operating income | $fill in the blank a78332ffd05f079_12 | $fill in the blank a78332ffd05f079_13 |
Cost of goods sold: | ||
$fill in the blank a78332ffd05f079_15 | $fill in the blank a78332ffd05f079_16 | |
fill in the blank a78332ffd05f079_18 | fill in the blank a78332ffd05f079_19 | |
$fill in the blank a78332ffd05f079_21 | $fill in the blank a78332ffd05f079_22 | |
fill in the blank a78332ffd05f079_24 | fill in the blank a78332ffd05f079_25 | |
Cost of goods sold | $fill in the blank a78332ffd05f079_26 | $fill in the blank a78332ffd05f079_27 |
Has firm performance, as measured by income, improved or
declined from Year 1 to Year 2?
2. Prepare income statements for both years using variable costing. If an amount is zero, enter "0".
Jellison Company | ||
Variable-Costing Income Statement | ||
For Years 1 and 2 | ||
Year 1 | Year 2 | |
$fill in the blank b5cb2cfbc071074_2 | $fill in the blank b5cb2cfbc071074_3 | |
fill in the blank b5cb2cfbc071074_5 | fill in the blank b5cb2cfbc071074_6 | |
Contribution margin | $fill in the blank b5cb2cfbc071074_7 | $fill in the blank b5cb2cfbc071074_8 |
Less: | ||
fill in the blank b5cb2cfbc071074_10 | fill in the blank b5cb2cfbc071074_11 | |
fill in the blank b5cb2cfbc071074_13 | fill in the blank b5cb2cfbc071074_14 | |
Operating income | $fill in the blank b5cb2cfbc071074_15 | $fill in the blank b5cb2cfbc071074_16 |
Variable cost of goods sold: | ||
$fill in the blank b5cb2cfbc071074_18 | $fill in the blank b5cb2cfbc071074_19 | |
fill in the blank b5cb2cfbc071074_21 | fill in the blank b5cb2cfbc071074_22 | |
$fill in the blank b5cb2cfbc071074_24 | $fill in the blank b5cb2cfbc071074_25 | |
fill in the blank b5cb2cfbc071074_27 | fill in the blank b5cb2cfbc071074_28 | |
Cost of goods sold | $fill in the blank b5cb2cfbc071074_29 | $fill in the blank b5cb2cfbc071074_30 |
Has firm performance, as measured by income, improved or
declined from Year 1 to Year 2?
3. Which method do you think most accurately
measures firm performance?
Absorption Costing Income Statement | Year 1 | Year 2 | ||
Sales | 960000 | 1080000 | ||
Beginning Invenotry | 0 | 103000 | ||
Add: Cost of goods manufactured | 927000 | 844000 | ||
Goods available for sale | 927000 | 947000 | ||
Less: Ending Inventory | 103000 | |||
Cost of goods sold | 824000 | 947000 | ||
Gross Profit | 136000 | 133000 | ||
Selling and administrative cost | 70600 | 70600 | ||
Net operating income | 65400 | 62400 |
Variable costing Income Statement | Year 1 | Year 2 | ||
Sales | 960000 | 1080000 | ||
Less: Variable Expenses | ||||
Beginning Invenotry | 0 | 83000 | ||
Add: Cost of goods manufactured | 747000 | 664000 | ||
Goods available for sale | 747000 | 747000 | ||
Less: Ending Inventory | 83000 | 664000 | 0 | 747000 |
Variable cost of goods sold | 296000 | 333000 | ||
Variable selling and administrative cost | 0 | 0 | ||
Contribution Margin | 296000 | 333000 | ||
Less: Fixed Expenses | ||||
Manufacturing Overhead | 180000 | 180000 | ||
Selling and administrative | 70600 | 250600 | 70600 | 250600 |
Net operating income | 45400 | 82400 |
Reconcilation | Year 1 | Year 2 | ||
Net income (Variable costing) | 45400 | Net income (variable costing) | 82400 | |
Add: Fixed Manufacturing OH Deffered | 20000 | Less:Fixed manufacturing OH released in | 20000 | |
in Closing Inventories | Opening Inventories | |||
Net income (absorption costing) | 65400 | Net income (absorption costing) | 62400 |
Absorption costing measures firm performance well as it excludes fixed manufacturing overhead portion in closing stock.