Question

Hanks Corporation produces a single product. Operating data for the company and its absorption costing income statements for the last two years are presented below:

	Year 1	Year 2
Units in beginning inventory	0	1,000
Units produced	9,000	9,000
Units sold	8,000	10,000

	Year 1	Year 2
Sales	$80,000	$100,000
Cost of goods sold	48,000	60,000
Gross margin	32,000	40,000
Selling and administrative expenses	28,000	30,000
Net operating income	$4,000	$10,000

Variable manufacturing costs are $4 per unit. Fixed manufacturing overhead was $18,000 in each year. This fixed manufacturing overhead was applied at a rate of $2 per unit. Variable selling and administrative expenses were $1 per unit sold.

Required:

a. Compute the unit product cost in each year under variable costing.

b. Prepare new income statements for each year using variable costing.

c. Reconcile the absorption costing and variable costing net operating income for each year.

Answer 1

a) Product unit cost in each year = $4

b)

Hanks Corporation
Income Statement (Variable Costing)
	Year 1	Year 2
Sales	$                        80,000	$                        100,000
Less: Variable expenses
Manufacturing cost	8,000*$4 = $32,000	10,000*$4 = 40,000
Selling and administrative expenses	8,000*$1 = $8,000	10,000*$1 = $10,000
Total variable expenses	$                        40,000	$                           50,000
Contribution margin	$                        40,000	$                           50,000
Fixed expenses
Fixed manufacturing overhead	$                        18,000	$                           18,000
Fixed selling and administrative expenses	$                        20,000	$                           20,000
Total fixed expenses	$                        38,000	$                           38,000
net operating income (Loss)	$                           2,000	$                           12,000

c)

Reconciliation
Net Income (Variable costing)	$                        2,000	$                      12,000
Add: Fixed Manufacturing overhead carried forward	1,000*$2 = $2,000
Less: Fixed Manufacturing overhead brought in		1,000*$2 = $2,000
Net Income (Absorption Costing)	$                        4,000	$                      10,000

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