Question

Kenzi Kayaking, a manufacturer of kayaks, began operations this year. During this first year, the company produced 1,000 kayaks and sold 750 at a price of $1,000 each. At this first year-end, the company reported the following income statement information using absorption costing Sales (750 * $1,000) Cost of goods sold (750 $425) Gross margin Selling and administrative expenses Net income $ 750,000 318,750 431,250 230,000 $ 201,250 Additional Information a. Product cost per kayak totals $425, which consists of $325 in variable production cost and $100 in fixed production cost-the latter amount is based on $100,000 of fixed production costs allocated to the 1,000 kayaks produced. b. The $230,000 in selling and administrative expense consists of $95,000 that is variable and $135,000 that is fixed. Required: 1. Prepare an income statement for the current year under variable costing. 2. Fill in the blanks:

Answer 1

Kenzi Kayaki
Calculation of Ending Inventory
	Year 1
Beginning Inventory	0
Add: Production	1000
Goods avaiable for sales	1000
Less: Sales	750
Ending Inventory	250
Budgeted manufacturing cost per unit under absorption costing
Fixed Manufacturing cost=(A)	100000
Production units=(B)	1000
Fixed Manufacturing cost per unit=(C )=(A)/(B)	100
Variable manufacturing cost per unit=(D)	325
Total Manufacturing cost per unit=(C )+(D)	425
Kenzi Kayaki
Income Statement under Variable Costing
Revenue=(750*$1000)=(A)	$      7,50,000.00
Variable cost:
Beginning Inventory=(i)	$                         -
Add: Variable manufacturing cost(1050*$325)=(ii)	$      3,25,000.00
Cost of goods available for sales=(i)+(II)	$      3,25,000.00
Less: Ending Inventory,(250*$325)=(iii)	$        -81,250.00
Variable cost of good sold=(I)+(II)-(III)	$      2,43,750.00
Variable selling & Administrative cost	$          95,000.00
Total Variable cost=(B)	$      3,38,750.00
Contribution Margin=(C )=(A)-(B)	$      4,11,250.00
Less: Fixed Cost=(D )
Manufacturing cost	$      1,00,000.00
Fixed selling & Administrative cost	$      1,35,000.00
Net Operating Income=(C )-(D)	$      1,76,250.00
Difference
Net opertaing Income under variable costing	$      1,76,250.00
Add: Fixed Manufacturing Overhead cost deferred in Inventory(250*$100)	$          25,000.00
Less: Fixed Manufacturing Overhead in Beginning Inventory	$                         -
Net opertaing Income under absorption costing	$      2,01,250.00
Net Income under absorption costing is higher than the net income under variable costing by	$          25,000.00
The dollar difference in Variable costing income and absorption costing income=(250 units @$100)=	$          25,000.00