Yale Company manufactures hair brushes that sell at wholesale for $3 per unit. The company had no beginning inventory in the prior year. These data summarize the current and prior year operations:
Prior Year | Current Year | |||||
Sales | 2,300 | units | 3,700 | units | ||
Production | 3,000 | units | 3,000 | units | ||
Production cost | ||||||
Factory—variable (per unit) | $ | 0.60 | $ | 0.60 | ||
—fixed | $ | 1,500 | $ | 1,500 | ||
Marketing—variable | $ | 0.40 | $ | 0.40 | ||
Administrative—fixed | $ | 500 | $ | 500 | ||
Required:
1. Prepare an income statement for each year based on full costing.
2. Prepare an income statement for each year based on variable costing.
3. Prepare a reconciliation of the difference each year in the operating income resulting from using the full costing method and variable costing method.
Ans. 1 | In absorption costing method, the unit product cost is the sum of all manufacturing costs per unit | |||||
whether it is fixed or variable. | ||||||
Unit product cost under Full Costing: | ||||||
Variable Overhead per unit | $0.60 | |||||
Fixed overhead per unit ($1,500 / 3000) | $0.50 | |||||
Product Cost per unit | $1.10 | |||||
*Fixed overhead per unit = Fixed overhead / Units produced | ||||||
Ans. | YALE COMPANY | |||||
Full costing | ||||||
Income Statement | ||||||
PARTICULARS | Prior Year | Current Year | ||||
Sales | $6,900 | $11,100 | ||||
Less: Cost of goods sold | ||||||
Opening inventory | $0 | $770 | ||||
Add: Cost of goods produced | $3,300 | $3,300 | ||||
Cost of goods available for sale | $3,300 | $4,070 | ||||
Less: Ending inventory | ($770) | $0 | ||||
Cost of goods sold (total) | $2,530 | $4,070 | ||||
Gross margin | $4,370 | $7,030 | ||||
Selling & Administrative expenses: | ||||||
Fixed | $500 | $500 | ||||
Variable | $920 | $1,480 | ||||
Total Selling and administrative expenses | $1,420 | $1,980 | ||||
Net Income | $2,950 | $5,050 | ||||
*Calculations : | ||||||
Beginning inventory for Prior year = 0 | ||||||
Ending inventory units for prior year = Production - Sales | ||||||
3,000 - 2,300 = 700 units | ||||||
Cost of ending inventory = Ending inventory units * Unit product cost = (700 * $1.1) = $770. | ||||||
Beginning inventory for Current year = Ending inventory for prior year = 700 units ($770) | ||||||
Ending inventory units for current year = Beginning inventory units + Units produced - Units sold | ||||||
700 + 3,000 - 3,700 = 0 units | ||||||
*Sales = Units sold * Unit selling price | ||||||
Prior Year (2,300 * $3) = $6,900 | ||||||
Prior Year (3,700 * $3) = $11,100 | ||||||
*Cost of goods produced = Units produced * Unit product cost | ||||||
Prior Year (3,000 * $1.1) = $3,300 | ||||||
Current year (3,000 * $1.1) = $3,300 | ||||||
*Variable selling and administrative cost = Variable marketing cost per unit * Units sold | ||||||
Prior Year (2,300 * $0.40) = $920 | ||||||
Current year (3,700 * $0.40) = $1,480 | ||||||
Ans. 2 | In variable costing method, the unit product cost is the sum of only variable | |||||
manufacturing costs per unit | ||||||
Unit product cost under Variable Costing: | ||||||
Variable Overhead per unit | $0.60 | |||||
Total production cost per unit | $0.60 | |||||
YALE COMPANY | ||||||
Variable Costing | ||||||
Income Statement | ||||||
PARTICULARS | Prior Year | Current Year | ||||
Sales | $6,900 | $11,100 | ||||
Less: Variable cost of goods sold: | ||||||
Opening inventory | $0 | $420 | ||||
Add: Cost of goods produced | $1,800 | $1,800 | ||||
Variable cost of goods available for sale | $1,800 | $2,220 | ||||
Less: Ending inventory | -$420 | $0 | ||||
Variable cost of goods sold | $1,380 | $2,220 | ||||
Gross Contribution Margin | $5,520 | $8,880 | ||||
Less: Variable Selling and Adm. Exp. | $920 | $1,480 | ||||
Contribution Margin | $4,600 | $7,400 | ||||
Less: Fixed expenses: | ||||||
Fixed manufacturing overhead | $1,500 | $1,500 | ||||
Fixed selling and adm. expenses | $500 | $2,000 | $500 | $2,000 | ||
Net operating income | $2,600 | $5,400 | ||||
*Cost of goods produced = Units produced * Unit product cost | ||||||
Prior Year (3,000 * $0.60) = $1,800 | ||||||
Current year (3,000 * $0.60) = $1,800 | ||||||
Cost of ending inventory = Ending inventory units * Unit product cost | ||||||
Prior year (700 * $0.60) = $420 | ||||||
Current year ( 0 * $0.60) = $0. | ||||||
*Variable selling and administrative cost = Variable marketing cost per unit * Units sold | ||||||
Prior Year (2,300 * $0.40) = $920 | ||||||
Current year (3,700 * $0.40) = $1,480 | ||||||
Ans. 3 | Prior Year: | |||||
Variable costing net income | $2,600 | |||||
Add: Ending inventory at fixed overhead per unit (700 * $0.50) | $350 | |||||
Absorption costing net income | $2,950 | |||||
Current Year : | ||||||
Variable costing net income | $5,400 | |||||
Less: Beginning inventory | ($350) | |||||
Absorption costing net income | $5,050 |
Yale Company manufactures hair brushes that sell at wholesale for $3 per unit. The company had no beginning inventory in...
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