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			Current Year
Sales		2,900	units		5,500	units
Production		4,200	units		4,200	units
Production cost
Factory—variable (per unit)	$	0.60		$	0.60
—fixed	$	2,100		$	2,100
Marketing—variable	$	0.40		$	0.40
Administrative—fixed	$	500		$	500

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.

3. Prepare a reconciliation of the difference each year in the operating income resulting from using the full costing method and variable costing method.

Answer 1

Ans. 1	In Full costing method, the unit product cost is the sum of all manufacturing costs per unit
	whether it is fixed or variable.
	Variable Overhead per unit	$0.60
	Fixed overhead per unit   ($2,100 / 4,200)	$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		$8,700		$16,500
	Less: Cost of goods sold
	Opening inventory	$0		$1,430
	Add: Cost of goods produced	$4,620		$4,620
	Cost of goods available for sale	$4,620		$6,050
	Less: Ending inventory	($1,430)		$0
	Cost of goods sold (total)		$3,190		$6,050
	Gross margin		$5,510		$10,450
	Selling & Administrative expenses:
	Fixed	$500		$500
	Variable	$1,160		$2,200
	Total Selling and administrative expenses		$1,660		$2,700
	Net Income		$3,850		$7,750
	*Calculations :
	Beginning inventory for Prior year = 0
	Ending inventory units for prior year = Production - Sales
	4,200 - 2,900 = 1,300 units
	Cost of ending inventory = Ending inventory units * Unit product cost = (1,300 * $1.1) = $1,430.
	Beginning inventory for Current year = Ending inventory for prior year = 1,300 units   ($1,430)
	Ending inventory units for current year = Beginning inventory units + Units produced - Units sold
	1,300 + 4,200 - 5,500   =   0 units
	*Sales = Units sold * Unit selling price
	Prior Year   (2,900 * $3)	$8,700
	Current Year   (5,500 * $3)	$16,500
	*Cost of goods produced = Units produced * Unit product cost
	Prior Year   (4,200 * $1.1)	$4,620
	Current year (4,200 * $1.1)	$4,620
	*Variable selling and administrative cost = Variable marketing cost per unit * Units sold
	Prior Year   (2,900 * $0.40)	$1,160
	Current Year   (5,500 * $0.40)	$2,200

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 Ans. YALE COMPANY Variable Costing Income Statement Prior Year Current Year $16,500 $8,700 $0 $2,520 $2,520 -$780 $780 $2,520 $3,300 PARTICULARS Sales Less: Variable cost of goods sold: Opening inventory Add: Cost of goods produced Variable cost of goods available for sale Less: Ending inventory Variable cost of goods sold Gross Contribution Margin Less: Variable Selling and Administrative expenses Contribution Margin Less: Fixed expenses: Fixed manufacturing overhead Fixed selling and adm. expenses Net operating income $1,740 $6,960 $1,160 $5,800 $3,300 $13,200 $2,200 $11,000 $2,100 $500 $2,100 $500 $2,600 $3,200 $2,600 $8,400

*Cost of goods produced = Units produced * Unit product cost Prior Year (4,200 * $0.60) $2,520 Current year (4,200 * $0.60) $2,520 Cost of ending inventory = Ending inventory units * Unit product cost Prior year (1,300 * $0.60) $780 Current year (0* $0.60) $0 *Variable selling and administrative cost = Variable marketing cost per unit * Units sold Prior Year (2,900 * $0.40) $1,160 Current Year (5,500 * $0.40) $2,200 Ans. 3 YALE COMPANY Reconciling Difference in Operating Income Between Full and Variable Costing Prior Year Change in inventory in units 1,300 (*) Fixed overhead rate $0.50 Difference in operating income $650.00 Current Year -1,300 $0.50 ($650.00) Change in inventory in units = Units produced - Units sold Prior Year (4,200 - 2,900) 1,300 Current year (4,200 - 5,500) -1,300