Bionic Cotton Inc. manufactures and sells high-quality sporting goods equipment under its highly recognizable Cool Cat logo. The company began operations on January 1, 2016, and operated at 100% of capacity (92,000 units) during the first month, creating an ending inventory of 9,000 units. During February, the company produced 83,800 garments during the month but sold 92,800 units at $90 per unit. The February manufacturing costs and selling and administrative expenses were as follows:
Number of Units | Unit Cost | Total Cost | |||
Manufacturing costs in February beginning inventory: | |||||
Variable | 9,000 | $56 | $ 504,000 | ||
Fixed | 9,000 | 12 | 108,000 | ||
Total | $68 | $612,000 | |||
February manufacturing costs: | |||||
Variable | 83,800 | $56 | $ 4,692,800 | ||
Fixed | 83,800 | 14 | 1,173,200 | ||
Total | $70 | $5,866,000 | |||
Selling and administrative expenses: | |||||
Variable | $ 1,360,000 | ||||
Fixed | 334,000 | ||||
Total | $1,694,000 |
Required: | |||
A. | Prepare an income statement according to the absorption costing concept for February.* | ||
B. | Prepare an income statement according to the variable costing concept for February.* | ||
C. | What is the reason for the difference in the amount of income
from operations reported in (A) and (B)?
|
The Absorption Costing Unit Product Cost | ||
Jan | Feb | |
Variable Manufacturing Cost | $56.00 | $56.00 |
Fixed Manufacturing Cost | $12.00 | $14.00 |
Unit Product cost | $68.00 | $70.00 |
1. The Absorption Costing Income Statement | |
Feb | |
No. of Unit Sold | 92800 |
Sales @$90 | $83,52,000 |
Less: Cost of Goods sold ((83800*70)+(9000*68)) | $64,78,000 |
Gross Margin | $18,74,000 |
Less: Selling and distribution expense | |
Variable Expense | $13,60,000 |
Fixed Expense | $3,34,000 |
Net operating income | $1,80,000 |
2. The Variable Costing Income Statement | |
Feb | |
No. of Unit Sold | 92800 |
Sales | $83,52,000 |
Less: Variable cost | |
variable cost of goods sold $56 | $51,96,800 |
Variable selling expense | $13,60,000 |
Contribution margin | $17,95,200 |
Fixed expense: | |
Fixed Manufacturing overheads | $11,73,200 |
Fixed selling expense | $3,34,000 |
Net operating Income | $2,88,000 |
3. Reconciliation Statement of Income | |
Feb | |
Income under variable c osting | $2,88,000.00 |
Less:
Fixed OH in Inventory (9000units @12)), |
$1,08,000.00 |
Income under Absorption Costing | $1,80,000.00 |
As shown in Reconciliation statement , difference in come as per different method is due to last year fixed overhead cost absorbed in ending inventory.
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