Question

Yale Company manufactures hair brushes that sell at wholesale for $3 per unit. The company had no beginning inventory in the prior year. These data summarize the current and prior year operations: Prior Year 3,300 units 5,800 units Current Year 6,700 units 5,800 units Sales Production Production cost Factory-variable (per unit) -fixed Marketing-variable Administrative-fixed $ 8.60 $ 2, see $ 0.40 $ See $ 8.60 $ 2,500 $ 0.40 $ See Required: 1. Prepare an income statement for each year based on full costing. 2. Prepare an income statement for each year based on variable costing. 13. Prepare a reconciliation of the difference each year in the operating income resulting from using the full costing method and variable costing method. Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 Prepare an income statement for each year based on full costing. YALE COMPANY Full Costing Income Statement Prior Year Current Year Less: Cost of goods sold Available for sale Cost of goods sold Gross margin Less: Selling and administrative costs Operating income < Required 1 Required 2 >

Answer 1

Ans. 1	In absorption costing method, the unit product cost is the sum of all manufacturing costs per unit
	whether it is fixed or variable.
	Unit product cost under Full Costing:
	Variable Overhead per unit	$0.60
	Fixed overhead per unit   ($2,500 / 5000)	$0.50
	Product Cost per unit	$1.10
	*Fixed overhead per unit = Fixed overhead / Units produced
Ans.	YALE COMPANY
	Full costing
	Income Statement
	PARTICULARS	Prior Year		Current Year
	Sales		$9,900		$20,100
	Less: Cost of goods sold
	Opening inventory	$0		$1,870
	Add: Cost of goods produced	$5,500		$5,500
	Cost of goods available for sale	$5,500		$7,370
	Less: Ending inventory	($1,870)		$0
	Cost of goods sold (total)		$3,630		$7,370
	Gross margin		$6,270		$12,730
	Selling & Administrative expenses:
	Fixed	$500		$500
	Variable	$1,320		$2,680
	Total Selling and administrative expenses		$1,820		$3,180
	Net Income		$4,450		$9,550
	*Calculations :
	Beginning inventory for Prior year = 0
	Ending inventory units for prior year = Production - Sales
	5,000 - 3,300 = 1,700 units
	Cost of ending inventory = Ending inventory units * Unit product cost = (1,700 * $1.1) = $1,870.
	Beginning inventory for Current year = Ending inventory for prior year = 1,700 units   ($1,870)
	Ending inventory units for current year = Beginning inventory units + Units produced - Units sold
	1,700 + 3,300 - 5,000 = 0 units
	*Sales = Units sold * Unit selling price
	Prior Year   (3,300 * $3) = $9,900
	Current Year   (6,700 * $3) = $20,100
	*Cost of goods produced = Units produced * Unit product cost
	Prior Year   (5,000 * $1.1) = $5,500
	Current year (5,000 * $1.1) = $5,500
	*Variable selling and administrative cost = Variable marketing cost per unit * Units sold
	Prior Year   (3,300 * $0.40)	$1,320
	Current Year   (6,700 * $0.40)	$2,680
Ans. 2	In variable costing method, the unit product cost is the sum of only variable
	manufacturing costs per unit
	Unit product cost under Variable Costing:
	Variable Overhead per unit	$0.60
	Total production cost per unit	$0.60
	YALE COMPANY
	Variable Costing
	Income Statement
	PARTICULARS	Prior Year		Current Year
	Sales		$9,900		$20,100
	Less: Variable cost of goods sold:
	Opening inventory	$0		$1,020
	Add: Cost of goods produced	$3,000		$3,000
	Variable cost of goods available for sale	$3,000		$4,020
	Less: Ending inventory	-$1,020		$0
	Variable cost of goods sold		$1,980		$4,020
	Gross Contribution Margin		$7,920		$16,080
	Less: Variable Selling and Adm. Exp.		$1,320		$2,680
	Contribution Margin		$6,600		$13,400
	Less: Fixed expenses:
	Fixed manufacturing overhead	$2,500		$2,500
	Fixed selling and adm. expenses	$500	$3,000	$500	$3,000
	Net operating income		$3,600		$10,400
	*Cost of goods produced = Units produced * Unit product cost
	Prior Year   (5,000 * $0.60) = $3,000
	Current year (5,000 * $0.60) = $3,000
	Cost of ending inventory = Ending inventory units * Unit product cost
	Prior year    (1,700 * $0.60) = $1,020
	Current   year    ( 0 * $0.60) = $0.
	*Variable selling and administrative cost = Variable marketing cost per unit * Units sold
	Prior Year   (2,300 * $0.40) = $920
	Current year (3,700 * $0.40) = $1,480
Ans. 3	Prior Year:
	Variable costing net income		$3,600
	Add: Ending inventory at fixed overhead per unit (1,700 * $0.50)		$850
	Absorption costing net income		$4,450
	Current Year :
	Variable costing net income		$10,400
	Less: Beginning inventory		($850)
	Absorption costing net income		$9,550