Question

Bharat Bicycle, located in India, produces an inexpensive yet rugged bicycle for use on crowded city streets. The company sells the bicycle for 540 rupees. (Indian currency is denominated in rupees, denoted by R.) Selected data for the company’s operations last year follow:

Units in beginning inventory		0
Units produced		18,300
Units sold		16,600
Units in ending inventory		1,700
Variable costs per unit:
Direct materials	R	143
Direct labour	R	173
Variable manufacturing overhead	R	45
Variable selling and administrative	R	34
Fixed costs:
Fixed manufacturing overhead	R	1,207,800
Fixed selling and administrative	R	805,200

An absorption costing income statement prepared by the company’s accountant appears below:

Sales (16,600 units × R540 per unit)				R	8,964,000
Cost of goods sold:
Beginning inventory	R	0
Add cost of goods manufactured         (18,300 units × R   ?   per unit)		7,814,100
Goods available for sale		7,814,100
Less ending inventory         (1,700 units × R   ?   per unit)		725,900			7,088,200
Gross margin					1,875,800
Selling and administrative expenses:
Variable selling and administrative		564,400
Fixed selling and administrative		805,200			1,369,600
Operating income				R	506,200

Required:

1.	Determine how much of the ending inventory of R725,900 above consists of fixed manufacturing overhead cost deferred in inventory to the next period.

      

2.	Prepare an income statement for the year using the variable costing method.

      

Answer 1

Absorption Costing Income Statement		Amount
Sales		8964000
Beginning Invenotry	0
Add: Cost of goods manufactured	7814100
Goods available for sale	7814100
Less: Ending Inventory	725900
Cost of goods sold		7088200
Gross Profit		1875800
Selling and administrative cost	1369600
Net operating income		506200

Fixed manufacturing overhead deffered in ending inventory= Ending inventory* fixed manufacturing overhead per unit

=1700*66= 112200

Variable costing Income Statement		Amount
Sales		8964000
Less: Variable Expenses
Beginning Invenotry	0
Add: Cost of goods manufactured	6606300
Goods available for sale	6606300
Less: Ending Inventory	613700	5992600
Variable cost of goods sold		2971400
Variable selling and administrative cost	564400
Contribution Margin		2407000
Less: Fixed Expenses
Manufacturing Overhead	1207800
Selling and administrative	805200	2013000
Net operating income		394000

Fo student's reference

Reconcilation		Amount
Net operating income (Variable costing)		394000
Add: Fixed Manufacturing OH Deffered		112200
in Closing Inventories
Net operating income (absorption costing)		506200