Question

My Sheep’s Wool Blanket Company produces wool blankets that it sells for $350 each.

My Sheep’s Wool Blanket Company began operations on January 1, 2015. The company uses actual costs and does not generally carry Work in Process Inventories at the end of the year. Costing for the first three years of operations is given below.

Variable Costs for the first three years of operation (2015, 2016 & 2017):

                                                               Per Blanket

Direct Material                                           $125

Direct Labor                                               $100

Variable Overhead                                      $30

Variable Selling Expense                              $10

Fixed Costs for each of the first three years of operation (2015, 2016 & 2017):

Fixed Overhead                                          $150,000

Total Fixed Selling and Administrative Costs    $250,000

The Selling Price is $350 per blanket for all three years. Production and Sales figures (In number of blankets) for the three years are below.

                                    2015                    2016                     2017

Production                      5,000                    10,000                   6,250

Sales                             4,000                    7,000                  10,000

My Sheep’s Wool Blanket uses the FIFO method to assign cost to any units left in Ending Finished Goods Inventory.

Tasks:

A.     

1. Prepare, in good form, two Income Statements for the year ending December 31, 2016: One using Absorption costing and one using Variable Costing. Use the formats that I used in the class example for Chapter 6.

2. Then, prepare a Reconciliation to explain the difference in the Net Operating Income figures. Again, use the format that I used in the class example.

B.      In a management meeting at the end of December 2017, you are provided with a Variable Income Statement for year ending December 31, 2017. The Variable Income Statement showed Net Operating Income of $450,000. WITHOUT DOING ANY INCOME STATEMENTS FOR THE YEAR ENDING DECEMBER 31, 2017, prepare a Reconciliation for that year (2017)) that will give us the Net Operating Income (Loss) figure using Absorption Costing. In other words, what was the Net Operating Income (Loss) for the year ending December 31, 2017? You are ONLY TO PREPARE A RECONCILIATION STATEMENT.

Answer 1

Construct The Absorption Costing Unit Product Cost
				2016
Direct Material				125
Direct labour				100
Variable Manufacturing overheads				30
Fixed Manufacturing overheads				15.00
Absorption costing unit prroduct cost				270.00
Construct the Absorption Costing Income Statement Under FIFO
				2016
Sales				$2,450,000
Cost of Goods sold				1905000
Gross Margin				$545,000
Selling and distribution expense				320,000
Net operating income				225,000
Compute the Variable costing Unit Product cost
				Year 1
Direct Material				125
Direct labour				100
Variable Manufacturing overheads				30
Variable costing unit prroduct cost				255
Construct The Variable Costing Income Statement under FIFO
				YEAR 1
Sales				2450000
Less: Variable cost
variable cost of goods sold				1,785,000
Variable selling expense				70,000
Contribution margin				595000
Fixed expense:
Fixed Manufacturing overheads				150000
Fixed selling expense				250000
Net operating Income				195000
RECONCILIATION STATEMENT:
Net income as per Variable costing						195000
Less: Fixed OH released in Beginning Inventory (1000 units @ 30)						30000
Add: Fixed OH deferred in Ending Inventory (4000 units @ 15)						60000
Net Income as per Aabsorption costing						225000
Req 2:
RECONCILIATION STATEMENT
Net Income as per variable costing						450000
Less: Fixed OH released in beginning inventory (3750 units @$15)						56250
Net income as per absorption costing						393750