Question

Exercise 6-3 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	$	40	per unit
Direct labor	$	60	per unit
Overhead costs for the year
Variable overhead	$	2,100,000
Fixed overhead	$	8,400,000
Selling and administrative costs for the year
Variable	$	725,000
Fixed	$	4,250,000
Production and sales for the year
Units produced		105,000	units
Units sold		75,000	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) Prepare an income statement for the year using variable costing S Company Variable Costing Income Statement Particulars Amount (S) Amount (S) 27,000,000 Sales (75.000 Units x $360) (a) Less: Variable costs Direct materials (75,000 Units x S40) Direct labor (75,000 Units x S60) Variable overheads (S2,100,000 + 105,000 Units x 75,000 Units) Variable selling and administratuve ex Total variable costs Contribution margin (c-a -b Less: Fixed e Fixed selling and administrative costs Fixed overhead costs Total fixede Net income (loss) (c - d) 3,000.000 4,500,000 1,500.000 725,000 9,725.000 17,275,000 ses 4,250,000 8,400,000 12,650,000 4,625,000 (2) Prepare an income statement for the year using absorption costing S Company Absorption Costing Income Statement Particulars Amount (S) Amount (S) 27,000,000 Sales (75,000 Units x S360) (a) Less: Cost of goods sold Direct materials (75,000 Units x S40) Direct labor (75,000 Units x S60) Variable overheads (S2,100,000 + 105,000 Units x 75,000 Units) Fixed overhead costs ($8,400,000 105,000 Unitsx 75,000 Units)6,000,000 Total cost of goods sold Contribution margin (c-a -b 3,000.000 4,500,000 1,500.000 15.000,000 12,000,000 ating expenses ess. Fixed selling and administrative costs Variable selling and administrative costs Total fixede Net income (loss) (c - d) 4.250.000 725,000 4,975,000 7,025,000 (3) Circumstances under which the reported income is identical under both absorption and variable costing methods The only circumstances under which the reported income is identical under both absorption and variable costing methods is where production equals sales and there is no beginning finished goods inventory