Question

B (Cick the icon to view the data) 2. Which statement shows the higher operating income? Why?

Requirement #1:

Answer 1

Ans 1 Unit product cost Variable Absorption costing costing Direct materials Direct labor Variable overhead-Manufacturing Fixed overhead per unit-Manu. Per unit cost 24.00 8.00 32.00 24 24 Absorption Income Statement Year-1 Sales revenue 91,65,000.00 Cost of goods sold: Beginning inventory Cost of goods manufactured Goods available for sale Less ending inventory Cost of goods sold 65,60,000 65,60,000 3,20,000 Gross Profit Operating Expenses(5*195000+245000) Net income 62,40,000.00 29,25,000.00 12,20,000.00 17,05,000.00

May Variable Costing Income Statement Sales revenue Less variable expenses: 91,65,000.00 Variable cost of goods sold $46,80,000 9,75,00056,55,000.00 35,10,000.00 Variable selling and admin Contribution margin Less fixed expenses: 16,40,000 Fixed manufacturing overhead Fixed Operating Expenses 2,45,00018,85,000.00 16,25,000.00 Net income Absorption Costing has higher profit as the closing stock in this method consist of fixed manu. Overhead expenses which is not the case in variable costing. Provided the reconcilation statement below for better understanding Ans 2 Reconciliation Absorption net income Fixed manufacturing costs in 17,05,000.00 ending inventory Variable costing net income 80,000.00 16,25,000.00

Ans 3 Absorption Income Statement Sales revenue 96,35,000.00 Cost of goods sold: Beginning inventory Cost of goods manufactured Goods available for sale Less ending inventory Cost of goods sold 65,60,000 65,60,000 Gross Profit Sales Promotion Expenses Operating Expenses(5*205000+245000) Net income 65,60,000.00 30,75,000.00 1,55,000.00 12,70,000.00 16,50,000.00 Conclusion As net profit comes down from $1705000 to 1650000, it shouldn't be opted for