Question

Oak Mart, a producer of solid oak tables, reports the following data from its second year of business.

Sales price per unit	$	320	per unit
Units produced this year		100,000	units
Units sold this year		103,500	units
Units in beginning-year inventory		3,500	units
Beginning inventory costs
Variable (3,500 units × $135)	$	472,500
Fixed (3,500 units × $75)		262,500
Total	$	735,000
Manufacturing costs this year
Direct materials	$	48	per unit
Direct labor	$	62	per unit
Overhead costs this year
Variable overhead	$	3,400,000
Fixed overhead	$	7,400,000
Selling and administrative costs this year
Variable	$	1,300,000
Fixed		4,400,000

1.  Prepare the current-year income statement for the company using variable costing.

OAK MART COMPANY Variable Costing Income Statement Sales Less: Variable costs Beginning inventory: Variable costs Manufacturing costs this year Variable overhead costs Direct materials Direct labor Total variable costs available 0 Less: Ending finished goods inventory Variable cost of goods sold Variable selling and administrative expenses Total variable costs 0 Contribution margin Less: Fixed expenses Fixed selling and administrative costs Fixed overhead costs ------------------- Net income (loss) -----------------------------

2. Prepare the current year income statement for the company using absorption costing.

OAK MART COMPANY Absorption Costing Income Statement Sales Less: Cost of goods sold Beginning inventory Manufacturing costs this year Variable overhead costs Direct labor Direct materials Less: Ending inventory Fixed overhead costs Cost of goods sold Gross margin Selling general and administrative expenses Fixed selling and administrative costs Variable selling and administrative expenses Net income (loss) Net income under variable costing is higher than net income under absorption costing by: Fixed costs added to(subtracted from) inventory

Answer 1

	Variable Costing income statement
	Sales					33120000
	less variable costs
	Beginning Inventory
	Variable costs				472,500
	manufacturing cost this year
	direct materials				4800000
	direct labor				6200000
	Variable overhead costs				3,400,000
	total variable costs available				14,872,500
	less:Ending finished goods inventory				0
	Variable cost of goods sold				14,872,500
	Variable selling and administrative expense				1,300,000
	Total variable costs					16,172,500
	contribution margin					16,947,500
	less:fixed expenses
	Fixed selling & administrative costs				4,400,000
	Fixed overhead costs				7,400,000
	total fixed expenses					11,800,000
	net income(loss)					5,147,500
	Absorptiong Costing income statement
	Sales						33120000
	less:cost of goods sold
	Beginning inventory'					735,000
	manufacturing costs this year
	Direct materials					4800000
	Direct labor					6200000
	variable overhead costs					3,400,000
	fixed overhead costs					7,400,000
	less:Ending inventory
	cost of goods sold						22,535,000
	Gross Margin						10,585,000
	Selling general & administrative expense
	Fixed selling and administrative costs					4,400,000
	variable selling and administrative expense					1,300,000
	total fixed expense						5,700,000
	net income(loss)						4,885,000
	net income under variable costing is higher than net income under						262,500
	absorption costing by
	number of units added to (subtracted from) inventory						3,500
	Fixed overhead cost per unit						75
	fixed costs added to(subtracted from) inventory						262500