Question

14. Majestic Industries has one product. Information about the production and sales of that product for the past year follow. (Click the icon to view the data.) The company had no beginning inventory Read the requirements Requirement 1. Prepare two income statements for the year, one using absorption costing and one using variable costing. Begin by preparing the income statement for the year using absorption costing, Majestic Industries Income Statement (Absorption Costing) For the Year Ended (1) Sales revenue Less: (2) Cost of goods sold (3) Gross profit Less (4) Operating expenses 768000 (5) Operating income Now prepare the income statement for the year using variable costing Majestic Industries Contribution Margin Income Statement (Variable Costing) For the Year Ended Less (10) Less (13) (14) Use the statements you prepared to answer the following questions 1a. What is the product cost per unit using absorption costing? 1b. What is the product cost per unit using variable costing? What is the ending inventory balance using absorption costing? 1d. What is the ending inventory balance using variable costing? 1e. What is cost of goods sold using absorption costing? 1f. What is cost of goods sold using variable costing?

Answer 1

Income Statement (Absorption Costing)
Sales Revenue	$       768,000	=16000*48
Less Cost of Goods Sold	$       576,000	=(21000*27+189000)/21000*16000
Gross Profit	$       192,000
Less Operating Expenses	$          77,000	=16000*2+45000
Operating Income	$       115,000

Income Statement (Variable Costing)
Sales Revenue	$       768,000	=16000*48
Less Variable Costs
Variable Cost of Goods Sold	$       448,000	=(21000*27+189000-168000)/21000*16000
Variable Operating Expenses	$          32,000	=16000*2
Contribution Margin	$       288,000
Less Fixed Costs
Less Fixed Manufacturing Overhead	$       168,000
Less Fixed Operating Expenses	$          45,000
Operating Income	$          75,000

1.
a. Product Cost per unit = (21000*27+189000)/21000 = $36 per unit

b. Product Cost per unit = (21000*27+189000-168000)/21000 = $28 per unit

c. Ending Inventory balance = 5000 x $36 = $180000

d. Ending Inventory balance = 5000 x $28 = $140000

e. Cost of Goods Sold = $576000

f. Cost of Goods Sold = $448000+168000 = $616000

g. Operating Income = $75000

h. Operating Income = $115000

2.
Underlying reason is under absorption costing fixed manufacturing overhead is carried forward in ending inventory and in variable costing fixed manufacturing overhead is written off completely