Problem

Sants Brakes Co.The current year’s income statement for Sants Brakes Co. on a variable cos...

Sants Brakes Co.

The current year’s income statement for Sants Brakes Co. on a variable costing basis appears in the accompanying table.

SANTS BRAKES COMPANY

Income Statement—Manufacturing For the Year Ended December 31 ($000s)

 

Product Lines

G-226

G-348

G-714

Total

Number of units sold (in thousands)

650

280

120

Sales revenue

$7,800

$2,240

$1,920

$11,960

Cost of goods sold

5,200

840

480

6,520

Manufacturing margin

$2,600

$1,400

$1,440

$ 5,440

Fixed overhead

 

 

 

3,600

Income from manufacturing

 

 

 

$ 1,840

Inventories of finished stock were increased during the year in anticipation of increases in sales volume in the current year. Inventories in units of product for the beginning and end of the year follow.

 

Beginning Inventory

Ending Inventory

G-226

20,000

90,000

G-348

50,000

90,000

G-714

20,000

50,000

The budgeted operating level for assigning fixed overhead to production is 1.8 million machine hours. One-half hour is required to produce a unit of G-226, two hours are required for a unit of G-348, and four hours are required for a unit of G-714.

Required:

a. Recast the income statement on an absorption costing basis.


b. Explain why the income from manufacturing on the absorption costing statement differs from the income on the variable costing statement. Show your computations.

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