Question

Exercise 06-3 Income reporting under absorption costing and variable costing LO P2 Sims Company, a manufacturer of tablet computers, began operations on January 1, 2019. Its cost and sales information for this year follows Manufacturing costs Direct materials Direct labor Overhead costs Variable 30 per unit 50 per unit 40 per unit $6,300,en (per year) Fixed Selling and administrative costs for the year Variable Fixed Production and sales for the year Units produced Units sold Sales price per unit $ 750,000 $5,000,000 105,000 units 75,000 units 360 per unit 1. Prepare an income statement for the year using variable costing

Answer 1

Ans. 1	In variable costing method, the unit product cost is the sum of only variable
	manufacturing costs per unit
	Unit product cost under Variable Costing:
	Direct materials	$30
	Direct labor	$50
	Variable Overhead per unit	$40
	Total production cost per unit	$120
	SIMS   COMPANY
	Variable Costing Income Statement
	Particulars		Amount
	Sales   (75,000 * $360)		$27,000,000
	Less: Variable cost of goods sold:
	Opening inventory	$0
	Add: Variable cost of goods manufactured (105,000 * $120)	$12,600,000
	Variable cost of goods available for sale	$12,600,000
	Less: Ending inventory [(105,000 - 75,000) * $120]	-$3,600,000
	Variable cost of goods sold		$9,000,000
	Gross Contribution Margin		$18,000,000
	Less: Variable Selling and Administrative expenses		$750,000
	Contribution Margin		$17,250,000
	Less: Fixed expenses:
	Fixed manufacturing overhead	$6,300,000
	Fixed selling and administrative expenses	$5,000,000	$11,300,000
	Net operating income		$5,950,000
	*Variable cost of goods manufactured = Units produced * Variable unit product cost
	*Ending inventory   = (Units produced - Units sold) * Production cost per unit
Ans. 2	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 Absorption Costing:
	Direct materials	$30
	Direct labor	$50
	Variable Overhead per unit	$40
	Fixed overhead per unit   ($6,300,000 / 105,000)	$60
	Product Cost per unit	$180
	*Fixed overhead per unit = Fixed overhead / Units produced
	SIMS   COMPANY
	Absorption Costing Income Statement
	PARTICULARS		Amount
	Sales   (75,000 * $360)		$27,000,000
	Less: Cost of goods sold
	Opening inventory	$0
	Add: Cost of goods manufactured (105,000*$180)	$18,900,000
	Cost of goods available for sale	$18,900,000
	Less: Ending inventory [(105,000 - 75,000) * $180]	-$5,400,000
	Cost of goods sold (total)		$13,500,000
	Gross margin		$13,500,000
	Selling & Administrative expenses:
	Fixed	$5,000,000
	Variable	$750,000
	Total Selling and administrative expenses		$5,750,000
	Net Income		$7,750,000
	*Cost of goods manufactured = Units produced * Absorption unit product cost