TCO D) Duif Company\'s absorption costing income statement for the last year of

ID: 2415633 • Letter: T

Question

TCO D) Duif Company's absorption costing income statement for the last year of operations is presented below.
Sales..........................................................................................$70,000
Less cost of goods sold:
Beginning inventory.............................................. 0
Add cost of goods manufactured..................48,000
Goods available for sale...................................48,000
Less ending inventory.......................................6,000
Cost of goods sold....................................................................42,000
Gross margin...............................................................................28,000
Less selling and admin. expenses........................................... 25,000
Net operating income................................................................$3,000
Data on units produced and sold for the year are given below.
Units in beginning inventory...................................0
Units produced....................................................8,000
Units sold.............................................................7,000

Variable manufacturing costs are $4 per unit. Fixed manufacturing overhead totaled $16,000 for the year. The fixed manufacturing overhead was applied to products at a rate of $2 per unit. Variable selling and administrative expenses were $3 per unit sold.

Required: Prepare a new income statement for the year using variable costing. Comment on the differences between the absorption costing and the variable costing income statements.

Explanation / Answer

Variable income statment'

Sales $70,000

less:Variable cost of goods sold (7000 *4) 28,000

Variable selling expense (2000* 3) 21,000

Contribution margin 21,000

less:Fixed expense

Manufcturing overhead (8000*2) 16,000

Selling 4,000

net income $1,000

The difference between the two is absortion costing takes fixed manufacturing overhead cost per unit as well into unit product cost .