Question

Sims Company, a manufacturer of tablet computers, began operations on January 1, 2017. Its cost and sales information for this year follows. $40 per unit $60 per unit $3,000,000 $7,000,000 Manufacturing costs Direct materials Direct labor. Overhead costs for the year Variable overhead Fixed overhead ... Selling and administrative costs for the year Variable. Fixed Production and sales for the year Units produced Units sold ... Sales price per unit $770,000 $4,250,000 100,000 units 70,000 units $350 per unit 1. Prepare an income statement for the year using variable costing. 2. Prepare an income statement for the year using absorption costing. 3. Under what circumstance(s) is reported income identical under both absorption costing and variable costing?

Answer 1

1) Under variable costing, unit product cost shall consider only variable mfg. costs incurred to to produce the number goods. Therefore, Direct material cost per unit Direct labor cost per unit Variable overhead cost per unit Product cost per unit $40 $60 $30 ($3000000 / 100000 units produced] $130 Sims Company Variable Costing Income Statement For The Year Ended December 31 Sales Revenue $24,500,000 (70000 units x $350] Variable Expenses: Manufacturing costs $9,100,000 (70000 units x $130] Selling & admin. expenses $770,000 (Given] Total Variable Expenses $9,870,000 Contribution Margin $14,630,000 (Sales Revenue - Total Variable Expenses] Fixed Expenses: Manufacturing costs $7,000,000 Selling & admin. expenses $4,250,000 Total Fixed Expenses $11,250,000 Net Operating Income (Loss) $3,380,000 (Contribution margin - Total Fixed Expenses]

2) Under absorption costing, unit cost of goods manufactured shall consider both variable and fixed manufacturing costs incurred to produce the number goods. Therefore, Variable product cost per unit Fixed manufacturing cost per unit Product cost per unit $130 [As calculated in Part-1] $70 ($7000000 / 100000 units produced] $200 Sims Company Absorption Costing Income Statement For The Year Ended December 31 Sales Revenue $24,500,000 (70000 units x $350] Cost of Goods Sold $14,000,000 (70000 units x $200] Gross Profit $10,500,000 (Sales Revenue - Cost of Goods Sold] Selling & admin. expenses $5,020,000 ($770000 + $4250000] Net Operating Income (Loss) $5,480,000

3) The only reason for the difference in net operating income (loss) between absorption costing and variable costing is the deferred fixed manufacturing overhead cost to next period through ending inventory under absorption costing. That is, under variable costing, entire fixed manufacturing overhead cost is considered as period cost and so charged to income statement. However, under the absorption costing, fixed mfg. overhead cost is considered as product cost and so a portion of it will be deferred to next reporting period through ending inventory. If number of units produced and sold are same, net operating income reported under both methods will be same. Reconciliation of Variable Costing and Absorption Costing Net Operating Incomes (Losses) Variable costing net operating income (loss) $3,380,000 (Ref: Part-1] Add: Fixed costs deferred to next period in ending inventory $2,100,000 [(100000 - 70000) units x $70 = 30000 units x $70 = $2100000] Absorption costing net operating income (loss) $5,480,000 --> Matched with Part-2's result When number of units produced and sold are same and there is no beginning inventory, net operating income reported under both the methods will be the same because fixed manufacturing costs won't be neither deferred to next period thru ending inventory or released in current period thru beginning inventory.