Question

Armilla Manufacturing manufactures a single product. Cost, sales, and production information for the company and its single product is as follows: (Click the icon to view the data.) Read the requirements. i More Info Requirement 1. Prepare an income statement for the upcoming year using variable costing. • Armilla Manufacturing Contribution Margin Income Statement (Variable Costing) For the Year Ended December 31 Sales revenue Less: Variable expenses Variable cost of goods sold Sales price per unit $46 Variable manufacturing costs per unit manufactured (DM, DL and variable MOH) $28 Variable operating expenses per unit sold $3 Fixed manufacturing overhead (MOH) in total for the year $108,000 Fixed operating expenses in total for the year $53,000 Units manufactured during the year 18,000 units Units sold during the year 16,000 units • Variable operating expenses Contribution margin Requirements Less: Fixed expenses Fixed manufacturing overhead Fixed operating expenses 1. 2. Operating income Prepare an income statement for the upcoming year using variable costing. Prepare an income statement for the upcoming year using absorption costing. What causes the difference in income between the two methods? 3. Choose from any list or enter any number in the input fields and then click Check Answer. Print Done parts remaining Clear All Check Answer

Answer 1

1 Income Statement under Variable Costing $ 736,000 less $ $ 448,000 48,000 Sales Variable Expense: Variable cost of goods sold Variable Operating expense Contribution Margin Fixed Expense: Fixed Manufacturing Overhead Fixed Operating expense Operating Income $ $ 496,000 240,000 less $ $ 108,000 53,000 $ $ 161,000 79,000 Sales = Units Sold x Selling Price per unit = 16000 x 46 = 736000 Variable COGS = Units Sold x Unit Product Cost =16000 x 28 = 448000 Variable operating exp = Units Sold x variable operating cost per unit = 16000 x 3 = 48000 2 Income Statement under Absorption costing 736,000 544,000 Less Sales Cost of Goods Sold Gross Margin Operating expense Operating Income $ $ $ $ $ Less 101,000 91,000 Fixed Manufacturing Overhead Per unit = Total Fixed Manufacturing Overhead / Total units Produced = 108000 / 18000 = $6 per unit Unit product cost = variable Mfg cost + Fixed Mfg Cost = 28 + 6 = $34 COGS = Units Sold x Unit Product Cost = 16000 x 34 = 544000 Operating Expense = Fixed + Variable cost = 53000 + (16000 x 3) = 101000 Difference in income between both method is due to Fixed manufacting cost, under absorption costing per units fixed cost is considered for units sold while in variable costing total fixed cost is considered. Here ending inventory is 2000 units (18000 - 16000), fixed mfg cost per unit is $6, Fixed mfg cost deffered = 2000 x 6 = 12000, which is also the difference in both incomes = 91000-79000 =12000. 3