Question

Company ABC produces a single product. This year the company produced 20,000 units but only sold 15,000 units at the price of $40 each. Variable manufacturing costs (including direct materials, director labor, and variable manufacturing overhead) total $10 per unit. Variable selling and administrative cost is $5 per unit. Fixed manufacturing overhead cost is $100,000 each year. Fixed selling and administrative cost is $120,000 each year. There is no inventory at the beginning of this year.

1. What is the net operating income this year using the absorption costing method? Please prepare the absorption costing income statement.
2. What is the net operating income this year using the variable costing method? Please prepare the variable costing income statement.

Answer 1

Solution 1:

ABC Company
Full Absorption income statement For the year ended Dec 31
Particulars	Details	Amount
Sales		$600,000.00
Cost of Goods Sold:
Cost of goods produced (20000*$15)	$300,000.00
Add: Opening Inventory	$0.00
Less: Ending Inventory (5000*$15)	$75,000.00	$225,000.00
Gross Profit		$375,000.00
Variable Selling & Administrative Expenses		$75,000.00
Fixed Selling & Administrative Expenses		$120,000.00
Net Operating Income		$180,000.00

Solution 2:

ABC Company
Variable costing income statement For the year ended Dec 31
Particulars	Per unit	Amount
Sales	$40.00	$600,000.00
Variable Cost:
Variable manufacturing cost	$10.00	$150,000.00
Variable Selling and Administrative Expenses	$5.00	$75,000.00
Contribution	$25.00	$375,000.00
Fixed Manufacturing Overhead		$100,000.00
Fixed Selling & Administrative Expenses		$120,000.00
Net Income		$155,000.00