Question

On October 31, the end of the first month of operations, Morristown & Co. prepared the following income statement based on absorption costing: Morristown & Co. Absorption Costing Income Statement For the Month Ended October 31 Sales (2,600 units) $117,000 Cost of goods sold: Cost of goods manufactured $85,500 Ending inventory (400 units) (11,400) Total cost of goods sold (74,100) Gross profit $42,900 Selling and administrative expenses (21,500) Operating income $21,400 If the fixed manufacturing costs were $42,900 and the variable selling and administrative expenses were $14,600, prepare an income statement using variable costing. Morristown & Co. Variable Costing Income Statement For the Month Ended October 31 $ Variable cost of goods sold: $ $ $ Fixed costs: $ Operating income $

Answer 1

absorption costing method consideres fixed manufacturing cost as product costs.

It is defferred to next period through ending invenory.

Variable costing consider fixed manufacturing cost as period cost. Entire fixed manufacturing cost is recorded as an expense in the period in which it incurs.

Step 1: find variable cost of goods sold

As per absorption costing variable cost of goods sold

= Total cost of goods manufactured-fixed manufacturing cost of goods sold

=$85,500-$42,900

=$42,600 for 3,000 units manufactured (2600 sold+400 ending inventory)

variable cost of goods sold =$42600/3000*2600 units =$36,920

Step 2: find fixed selling and admin expenses

=$21,500-$14,600

=$6,900

Income statement as per variable costing method

Sales		$117,000
Less: variable expenses
cost of goods sold	$36,920
variable selling and administrative expenses	$14,600
Total variable expenses		($51,520)
Contribution margin		$65,480[$117,000-51,520]
Less: fixed costs
Fixed manufacturing overhead	$42,900
selling and administrative expense	$6900
Total fixed costs		$49,800
Operating Income		$15,680 [$65,480-$49,800]

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