Question

Description Beginning raw materials inventory Ending raw materials inventory Materials purchased Beginning work in process inventory Ending work in process inventory Beginning finished goods inventory Ending finished goods inventory Direct Labor Manufacturing overhead (Fixed) Manufacturing overhead (Variable) Revenue General and Administrative Expenses Selling Expenses Amount $200,000 $500,000 $1,800,000 $650,000 $200,000 $300,000 $900,000 $1,500,000 $1,200,000 $800,000 $10,000,000 $2,500,000 $1,200,000 Prepare a variable costing income statement Revenue Cost of goods sold Gross Profit Expenses Total Expenses NET INCOME (LOSS)

Answer 1

Variable costing income statement
Revenue		$10,000,000
Cost of goods sold (1)		$3,650,000
Gross profit ( Revenue - COGS) (a)		$6,350,000
Expenses
Fixed manufacturing overhead	$1,200,000
Fixed general and administrative expenses	$2,500,000
Selling expenses	$1,200,000
Total expenses (b)		$4,900,000
NET INCOME (a-b)		$1,450,000

Explanation - (1) Cost of goods sold - To calculate the cost of goods sold, following steps are included:

(a) Begin with the Start Raw Materials Inventory value and add all raw materials purchased during the specified accounting period. Subtract the end value of the inventory. This will be the valuation of the direct materials used in the production.

Beginning raw materials inventory - Ending raw materials inventory = Direct materials used in production

$200,000 - $500,000 = $(300,000)

(b) Next, add Direct labour, materials purchased and variable manufacturing overhead. Add this sum to direct materials used in production from step (a). It is Total manufacturing costs.

Direct labour + Materials purchased + Variable manufacturing overhead + direct materials used in production = Total manufacturing costs

$1,800,000 + $1,500,000 + $800,000 - $300,000 = $3,800,000

(c) Take the beginning work in progress inventory and subtract the ending work in progress inventory from it and add it to the total manufacturing cost from step (b). This is the cost of goods manufactured.

Beginning Work in progress inventory - Ending work in progress + Total manufacturing cost = COGM

$650,000 - $200,000 + $3,800,000= $4,250,000

(d) Finally take the beginning finished goods inventory and subtract the ending finished goods inventory and add it to the COGM. This is the Total cost of goods sold.

Beginning finished goods inventory - ending finished goods inventory + COGM = COGS

$300,000 - $900,000 + $4,250,000= $3,650,000