Question

Estimated Income Statements, using Absorption and Variable Costing

Prior to the first month of operations ending October 31 Marshall Inc. estimated the following operating results:

Sales (13,600 x $48)	$652,800
Manufacturing costs (13,600 units):
Direct materials	393,040
Direct labor	92,480
Variable factory overhead	43,520
Fixed factory overhead	51,680
Fixed selling and administrative expenses	14,100
Variable selling and administrative expenses	17,000

The company is evaluating a proposal to manufacture 15,200 units instead of 13,600 units, thus creating an Inventory, October 31 of 1,600 units. Manufacturing the additional units will not change sales, unit variable factory overhead costs, total fixed factory overhead cost, or total selling and administrative expenses.

a. 1. Prepare an estimated income statement, comparing operating results if 13,600 and 15,200 units are manufactured in the absorption costing format. If an amount box does not require an entry leave it blank or enter “0”.

Marshall Inc.
Absorption Costing Income Statement
For the Month Ending October 31
	13,600 Units Manufactured	15,200 Units Manufactured
	$	$
Cost of goods sold:
	$	$
	$	$
	$	$
Income from operations	$	$

a. 2. Prepare an estimated income statement, comparing operating results if 13,600 and 15,200 units are manufactured in the variable costing format. If an amount box does not require an entry leave it blank or enter “0”.

Marshall Inc.
Variable Costing Income Statement
For the Month Ending October 31
	13,600 Units Manufactured	15,200 Units Manufactured
	$	$
Variable cost of goods sold:
	$	$
	$	$
	$	$
	$	$
Fixed costs:
	$	$
Total fixed costs	$	$
	$	$

b. What is the reason for the difference in income from operations reported for the two levels of production by the absorption costing income statement?

The increase in income from operations under absorption costing is caused by the allocation of   overhead cost over a   number of units. Thus, the cost of goods sold is  . The difference can also be explained by the amount of   overhead cost included in the   inventory.

Answer 1

Absorption-Costing Income Statement- Marshall Inc.
For the First Year of Operations
Unit Produced	13600	15200
Unit Sold (a)	13600	13600
Sales ($48Xa)	$652,800.00	$652,800.00
Less: Cost of goods sold @$42.70, $42.30	$580,720.00	$575,280.00
Gross profit	$72,080.00	$77,520.00
Less: Selling & Administration Expense
Variabel Selling nd Admin Expense	$17,000.00	$17,000.00
Fixed Selling and Admin Expense	$14,100.00	$14,100.00
Operating income	$40,980.00	$46,420.00
Variable-Costing Income Statement
For the First Year of Operations
	13600	15200
Unit Sold (a)	13600	13600
Sales ($48Xa)	$652,800.00	$652,800.00
Less: Variable Cost
Variable cost of goods sold @ $38.90	$529,040.00	$529,040.00
Variable selling expense	$17,000.00	$17,000.00
Contribution margin	$106,760.00	$106,760.00
Less: Fixed Expense
Fixed Manufacturign Overhead	$51,680.00	$51,680.00
Fixed Selling and Admin Expense	$14,100.00	$14,100.00
Operating income	$40,980.00	$40,980.00
Computation of Unit Cost , If 13600 Unit Produced
	Absorption costing	Variable costing
Direct materials ($393040 / 13,600)	$28.90	$28.90
Direct labor ($92480 / 13600)	$6.80	$6.80
Variable factory overhead ($43520 / 13600)	$3.20	$3.20
Fixed factory overhead ($51680 / 13600)	$3.80
Total manufacturing costs per unit	$42.70	$38.90
Computation of Unit Cost , If 15200 Unit Produced
	Absorption costing	Variable costing
Direct materials	$28.90	$28.90
Direct labor	$6.80	$6.80
Variable factory overhead	$3.20	$3.20
Fixed factory overhead ($51680 / 15200)	$3.40
Total manufacturing costs per unit	$42.30	$38.90

The increasse in income under Absorption costing is caused by the allocation of fixed factory overheads over a more number of units.Thus the cost of goods sold is less. The difference can also be explained by the amount of the fixed overhead cost included in Ending inventory.