Question

Abe Company, which has only one product, has provided the following data concerning its most + recent month of operations: Selling price Units in beginning inventory Units produced Units sold Units in ending inventory Variable costs per unit: Direct materials Direct labor Variable manufacturing overhead Variable selling and administrative Fixed costs: Fixed manufacturing overhead $156.600 Fixed selling and administrative $151,200 1. Using variable costing method, prepare the income statement for the year. Sales revenue Variable expenses Contribution margin Fixed expenses Net operating income 2. Using absorption costing method, prepare the income statement for the year. Sales revenue Cost of goods sold Gross margin Selling and administrative expenses Net operating income

Answer 1

Abe Company
Variable Costing Income Statement
For the recent month
Sales revenue                       [Units sold x Selling price = 8,400 units x $126]	$1,058,400
Varible expenses                  [Refer working note 1]	$739,200
Contribution Margin           [Sales - Variable expenses]	$319,200
Fixed expenses                      [Refer working note 4]	$307,800
Net Operating Income          [Contribution margin - Fixed expenses]	$11,400

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Abe Company
Absorption Costing Income Statement
For the recent month
Sales revenue                       [Units sold x Selling price = 8,400 units x $126]	$1,058,400
Cost of Goods Sold                          [Refer Working note 5]	$831,600
Gross Margin                                  [Sales - Cost of goods sold]	$226,800
Selling and administrative Expense    [Refer working note 6]	$210,000
Net Operating Income            [Gross Margin - Selling and Administrative expenses]	$16,800

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Working note 1 - Computation of variable expenses
Variable Manufacturing Costs                               [Refer working note 2]              (a)	$680,400
Variable Selling and administrative expenses        [Refer working note 3]              (b)	$58,800
Total variable expenses                                                                                            (a + b)	$739,200

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Working note 2 - Computation of variable manufacturing costs under variable costing
Direct material cost                                                   (a)	$30
Direct labor cost                                                        (b)	$48
Variable manufacturing overhead                              (c)	$3
Variable manufacturing cost per unit                     (d = a + b + c)	$81
Units sold                                                                   (e)	8400
Variable manufacturing costs                                     (d x e)	$680,400

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Working note 3 - Computation of variable selling and administrative expenses
Variable selling and administrative expense per unit          (a)	$7
Units sold                                                                             (b)	8400
Variable selling and administrative expenses                     (a x b)	$58,800

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Working note 4 - Computation of Fixed expenses
Fixed Manufacturing Overhead                                 (a)	$156,600
Fixed General and Administrative Expenses            (b)	$151,200
Total fixed expenses                                                  (a + b)	$307,800

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Working note 5 - Computation of cost of goods sold
Direct material cost                                                                                                                          (a)	$30.00
Direct labor cost                                                                                                                               (b)	$48.00
Variable manufacturing overhead                                                                                                      (c)	$3.00
Fixed manufacturing overhead per unit                                                                                              (d) [Fixed manufacturing overhead ÷ Number of units produced = $156,600 ÷ 8,400 units]	$18.00
Cost per unit                                                                                                                                   (e = a + b + c + d)	$99.00
Units sold                                                                                                                                         (f)	8400
Cost of goods sold                                                                                                                           (e x f)	$831,600

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Working note 6 - Computation of Selling and administrative expenses
Variable selling and administrative expenses   [Refer working note 3]                     (a)	$58,800
Fixed selling and administrative expenses                                                                  (b)	$151,200
Total Selling and administrative expenses                                                                  (a + b)`	$210,000