Question

Perez Manufacturing pays its production managers a bonus based on the company's profitability. During the two most recent years, the company maintained the same cost structure to manufacture its products.

(Assume that selling and administrative expenses are associated with goods sold.)

Levine sells its products for $108.9 per unit.

Required

a. Prepare income statements based on absorption costing for 2018 and 2019 .

b. Since Levine sold the same number of units in 2018 and 2019 , why did net income increase in 2019 ?

d. Determine the costs of ending inventory for 2019 .

e. Prepare income statements based on variable costing for 2018 and 2019 .

Answer 1

Part a)

Req A 2018

The income statements based on absorption costing are prepare as below:

Perez Manufacturing
Absorption Costing Income Statement
For the Year Ended Dec. 31, 2018
Revenues (4,000*108.90)		435,600
Cost of Goods Sold:
Direct Materials (4,000*13.7)	-54,800
Direct Labor (4,000*23.1)	-92,400
Manufacturing Overhead (4,000*10.2 + 107,400)	-148,200
		-295,400
Gross Margin		140,200
Selling and Administrative Expenses (4,000*8.1 + 57,000)		-89,400
Net Income		$50,800

_____

Req A 2019

Perez Manufacturing
Absorption Costing Income Statement
For the Year Ended Dec. 31, 2019
Revenues (4,000*108.90)		435,600
Cost of Goods Sold:
Direct Materials (4,000*13.7)	-54,800
Direct Labor (4,000*23.1)	-92,400
Manufacturing Overhead (4,000*10.2 + 107,400*4,000/6,000)	-112,400
		-259,600
Gross Margin		176,000
Selling and Administrative Expenses (4,000*8.1 + 57,000)		-89,400
Net Income		$86,600

_____

Part b)

The net income increased in 2019 because of decrease in fixed manufacturing cost. In 2018, the value of fixed manufacturing cost was $107,400 while in 2019 it reduced to $71,600 because of increase in the number of units produced. Fixed manufacturing costs decrease with an increase in production.

_____

Part c)

The cost of ending inventory for 2019 is arrived as follows:

Cost of Ending Inventory = (Units Produced - Units Sold)*(Direct Material Cost Per Unit + Direct Labor Cost Per Unit + Variable Manufacturing Overhead Per Unit) + Fixed Manufacturing Overhead Unsold Units

Substituting values in the above formula, we get,

Cost of Ending Inventory = (6,000 - 4,000)*(13.7 + 23.1 + 10.2) + 107,400*2,000/6,000 = $129,800

_____

Part d)

The income statements based on variable costing are prepare as below:

Req E 2018

Perez Manufacturing
Variable Costing Income Statement
For the Year Ended Dec. 31, 2018
Revenues (4,000*108.90)		435,600
Cost of Goods Sold:
Direct Materials (4,000*13.7)	-54,800
Direct Labor (4,000*23.1)	-92,400
Manufacturing Overhead (4,000*10.2)	-40,800
Variable Selling and Administrative Expenses (4,000*8.1)	-32,400
		-220,400
Contribution Margin		215,200
Fixed Manufacturing Overhead		-107,400
Fixed Selling and Administrative Expenses		-57,000
Net Income		$50,800

_____

Req E 2019

Perez Manufacturing
Variable Costing Income Statement
For the Year Ended Dec. 31, 2019
Revenues (4,000*108.90)		435,600
Cost of Goods Sold:
Direct Materials (4,000*13.7)	-54,800
Direct Labor (4,000*23.1)	-92,400
Manufacturing Overhead (4,000*10.2)	-40,800
Variable Selling and Administrative Expenses (4,000*8.1)	-32,400
		-220,400
Contribution Margin		215,200
Fixed Manufacturing Overhead		-107,400
Fixed Selling and Administrative Expenses		-57,000
Net Income		$50,800