Question

Income Statements under Absorption Costing and Variable Costing

Joplin Industries Inc. manufactures and sells high-quality sporting goods equipment under its highly recognizable J-Sports logo. The company began operations on May 1 and operated at 100% of capacity (66,000 units) during the first month, creating an ending inventory of 6,000 units. During June, the company produced 60,000 garments during the month but sold 66,000 units at $95 per unit. The June manufacturing costs and selling and administrative expenses were as follows:

	Number of Units		Unit Cost		Total Cost
Manufacturing costs in June 1 beginning inventory:
Variable	6,000		$38.00		$228,000
Fixed	6,000		14.00		84,000
Total			$52.00		$312,000
Manufacturing costs in June:
Variable	60,000		$38.00		$2,280,000
Fixed	60,000		15.40		924,000
Total			$53.40		$3,204,000
Selling and administrative expenses in June:
Variable	66,000		18.20		$1,201,200
Fixed	66,000		7.00		462,000
Total			25.20		$1,663,200

a. Prepare an income statement according to the absorption costing concept for June.

Joplin Industries Inc.
Absorption Costing Income Statement
For the Month Ended June 30
		$
Cost of goods sold:
	$
		$
		$

b. Prepare an income statement according to the variable costing concept for June.

Joplin Industries Inc.
Variable Costing Income Statement
For the Month Ended June 30
		$
		$
		$
Fixed costs:
	$
		$

c. What is the reason for the difference in the amount of income from operations reported in (a) and (b)?

Under the   method, the fixed manufacturing cost included in the cost of goods sold is matched with the revenues. Under  , all of the fixed manufacturing cost is deducted in the period in which it is incurred, regardless of the amount of inventory change. Thus, when inventory decreases, the   income statement will have a lower income from operations.

Answer 1

a)Income statement under absorption costing

absorption costing
	($)	($)
sales		6270000
manufacturing cost	3204000
+ opening balance	312000
cost of production		3516000
cost of goods sold
+ selling and admin expenses	1663200
		1663200
total cost		5179200
profit		1090800

b) Income statement under variable costing

variable costing
	($)	($)
sales		6270000
variable manufacturing cost	2280000
+ opening balance (variable)	228000
+ selling and admin variable expenses	1201200
total variable cost		3709200
contribution		2560800
fixed cost
manufacturing	924000
selling and admin	462000
total fixed cost		1386000
profit		1174800

In this, fixed manufacturing cost of opening inventory is not recorded as it was incurred in previous period. Under variable costing all fixed costs that are incurred in that period only are undertaken.

c) There is a difference in income in both cases. This is because whole cost is taken under absorption costing. Whereas in variable costing, fixed cost incurred in previous period is not recorde.