Question

Borunda Corporation has provided the following data for its two most recent years of operation:

	Selling price per unit	$83
	Manufacturing costs:
	Variable manufacturing cost per unit produced:
	Direct materials	$9
	Direct labor	$7
	Variable manufacturing overhead	$3
	Fixed manufacturing overhead per year	$360,000
	Selling and administrative expenses:
	Variable selling and administrative expense per unit sold	$6
	Fixed selling and administrative expense per year	$77,000

		Year 1	Year 2
	Units in beginning inventory	0	2,000
	Units produced during the year	10,000	12,000
	Units sold during the year	8,000	12,000
	Units in ending inventory	2,000	2,000

Required:

a. Assume the company uses absorption costing. Prepare an income statement for each year.

b. Assume the company uses variable costing. Prepare an income statement for each year.

c. Prepare a report in good form reconciling the variable costing and absorption costing net incomes.

Answer 1

Note 1)	Unit product cost under absorption costing(This note is for understanding only)
	Particulars	Year 1		Year 2
	Direct Material	9		9
	Direct Labour	7		7
	Variable Manufacturing OH	3		3
	Fixed manufacturing OH	36	(360000/10000)	30	(360000/12000)
	Unit product Cost	55		49
1)	Operating Income statement (Absorption Costing)
	Particulars		Year 1		Year 2
	Sales		664000	(8000*83)	996000	(12000*83)
	Less: Cost of Goods Sold		440000	(8000*55)	600000	(2000*55)+(10000*49)
	(Manufacturing cost per unit * No. of Units Sold)
	Gross Margin		224000		396000
	Less: Variable Selling & administrative Cost	48000		48000
	Less: Fixed selling and admin	77000		77000
	Net Operating Income		99000		271000
	Operating Income statement (Variable Costing)
	Particulars		Year 1		Year 2
	Sales		664000	(8000*83)	996000	(12000*83)
	Less: Variable Expenses
	Variable cost of goods sold		152000	(8000*19)	228000	(12000*19)
	Variable selling and admin		48000	(8000*6)	72000	(12000*6)
	Contribution Margin		464000		696000
	Less: Fixed expense
	Fixed Manufacturing Overhead	360000		360000
	Fixed Selling and Admin		77000		77000
	Net Operating Income		27000		259000
	Income under variable costing	27000		259000
	Add: Portion of fixed manufacturing overhead of ending inventory not deducted under absorption costing	72000	(2000 i.e. ending inventory * 36 i.e. Fixed MOH per unit)	72000
	Less: Portion of opening invetntory not added in cost of goods sold iin variable costing	0		-60000
	Income under absorption costing	99000		271000