Question

Exercise 19-3 Income reporting under absorption costing and variable costing LO P2

Sims Company, a manufacturer of tablet computers, began operations on January 1, 2017. Its cost and sales information for this year follows.

Manufacturing costs
Direct materials	$	35	per unit
Direct labor	$	55	per unit
Overhead costs for the year
Variable overhead	$	4,400,000
Fixed overhead	$	6,600,000
Selling and administrative costs for the year
Variable	$	775,000
Fixed	$	4,000,000
Production and sales for the year
Units produced		110,000	units
Units sold		80,000	units
Sales price per unit	$	360	per unit

1. Prepare an income statement for the year using variable costing.
2. Prepare an income statement for the year using absorption costing.
3. Under what circumstance(s) is reported income identical under both absorption costing and variable costing?

Answer 1

1
SIMS COMPANY
Variable Costing Income Statement
Sales		28800000	=80000*360
Less: Variable costs
Direct materials	2800000		=80000*35
Direct labor	4400000		=80000*55
Variable overhead costs	4400000
Variable selling and administrative expenses	775000
Total variable costs		12375000
Contribution margin		16425000
Less: Fixed expenses
Fixed selling and administrative costs	4000000
Fixed overhead costs	6600000
Total fixed expenses		10600000
Net income (loss)		5825000
2
SIMS COMPANY
Absorption Costing Income Statement
Sales		28800000
Less: Cost of goods sold
Direct materials	2800000
Direct labor	4400000
Variable overhead costs	4400000
Fixed overhead costs	4800000		=6600000/110000*80000
Cost of goods sold		16400000
Gross margin		12400000
Selling general and administrative expenses
Fixed selling and administrative costs	4000000
Variable selling and administrative expenses	775000
Total selling, general and administrative expenses		4775000
Net income (loss)		7625000
3
Production equals sales and there is no beginning finished goods inventory