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		2,000	units		2,800	units
Production		2,400	units		2,400	units
Production cost
Factory—variable (per unit)	$	0.60		$	0.60
—fixed	$	1,200		$	1,200
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

Yale Company Income Statement - Full Costing Prior Year 6000 Current Year 8400 Sales Less:Cost of goods sold Beginning Inventory Cost of goods produced Available for sale Less:Ending Inventory Cost of goods sold Gross Margin Less:Selling and Admin costs Fixed Variable 0 2640 2640 440 440 2640 3080 3080 2200 3800 5320 500 800 500 1120 1620 1300 2500 Operating Income 3700 Income Statement - Variable Costing Prior Year 6000 Current Year 8400 1440 Sales Less:Cost of goods sold Beginning Inventory Cost of goods produced Available for sale Less:Ending Inventory Cost of goods sold Add:Variable selling and admin 240 1440 1680 1440 240 1200 800 1680 1120 2000 4000 2800 5600 Contribution Margin Less:Fixed Manufacturing costs Fixed Selling and admin costs 1200 500 1200 500 1700 2300 1700 3900 Operating Income Reconciling Difference in Operating Income Between Full and Variable costing Prior Year Current Year Change in Inventory units 400 -400 x Fixed Overhead Rate 0.5 Difference in Operating Income 200 -200 0.5 1200/2400 = 0.50