Question

Huang Company operates with a single product. The following simple income statement relates to last year when sales units totaled26,500

                          Variable Costing                                               GAAP Absorption Costing

                                                   Total $     Per unit $                                         Total $

Sales                                          530,000     20.00             Sales                                x

Variable COGS                         185,500       7.00             COGS                              x

Variable S&A expense               92,750        3.50              Gross margin                  x

Contribution margin                251,750 9.50              S&A expenses                x

Fixed Man Ovrhd expenses     121,500                           Net operating income        x

Fixed S&A expenses                 42,000

Net operating income                88,250

Huang Company unit production for the year totaled 27,000.

Prepare a GAAP income statement for Huang Company. Reconcile any difference between the Variable costing and GAAP net operating incomes.

Answer 1

Solution:

Part A :GAAP income statement for Huang Company

Huang Company
Income Statement for the Year
Particulars	Amount($)	Amount($)
Sales (27000* $20/unit)		540,000
Cost of Goods sold
Variable COGS (27000* $7/unit)	189,000
Fixed Man Overhead	121,500	310,500
Gross Profit		229,500
Operating Expenses
Selling& Administration
Variable(27000*$3.50/unit)	94,500
Fixed	42,000
Total operating expenses		136,500
Income from Operations		93,000
Net Income for the Year		93,000.

Part B: Net Operating Income as per variable costing method.

Huang Company
Net operating Income-Variable Costing Method
Particulars	Amount($)	Amount($)
Sales		540,000
Variable COGS (27000* $7/unit)	189,000
Variable S& A(27000*$3.50/unit)	94,500	283,500
Contribution Margin		256,500
Fixed Man Overhead	121,500
Fixed Selling& Administration	42,000	163,500
Net Operating Income		93,000

Note: As per GAAP accounting framework, overhead also be allocated to inventory as a result of which fixed overheads which are directly related to production are included in cost of goods sold. At the same time in variable costing, initially we reduce all cost which changes directly with level of production(variable cost) to reach out at Contribution, and then fixed expenses are reduced from contribution margin to reach at Operating income.

In both methods operating income will be same only unless there is difference in number of unit produced and sold.

In both cases,we compare net operating income and in both cases it is same as $93,000. Hence there is no requirement of reconciliation statement .