Thomas Company produces a single product. Operating data for the company and its

Question

Thomas Company produces a single product. Operating data for the company and its absorption costing income statement for the last year is presented below. Units in beginning inventory..................................................0 Units produced....................................................................9,000 Units sold.............................................................................8,000 Sales......................................................... .........................$80,000 Less cost of goods sold: Beginning inventory.............................................. 0 Add cost of goods manufactured..................54,000 Goods available for sale...................................54,000 Less ending inventory........................................6,000 Cost of goods sold.............................................................48,000 Gross margin........................................................................32,000 Less selling and admin. expenses.....................................28,000 Net operating income.........................................................$4,000 Variable manufacturing costs are $4 per unit. Fixed manufacturing overhead totals $18,000 for the year. The fixed manufacturing overhead was applied at a rate of $2 per unit. Variable selling and administrative expenses were $1 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 costing Income Statement:

The difference in net operating income of $ 2,000 is due to fixed manufacturing overhead cost @ $ 2 per unit applied to 1,000 units of ending inventory under absorption costing system. Under variable costing technique, all variable costs are inventorial (product) costs, and all fixed costs are period expenses.

$ $ Sales ( 8,000 units @ $ 10) 80,000 Less variable costs Manufacturing ( 8,000 units @ $ 4) 32,000 Selling and administrative ( 8,000 units @ $ 1) 8,000 40,000 Contribution margin 40,000 Less Fixed costs Manufacturing 18,000 Selling and administrative 20,000 38,000 Net operating income 2,000

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