Valuable costing income statement On July 31, 2016 the end of the month of opera

Question

Valuable costing income statement On July 31, 2016 the end of the month of operations, Rhys Company prepared the following income statement, based on the absorption costing concept: Sales (96,000 units)…………….. $4,440,000 Cost of goods sold: Cost of goods manufactured $3,120,000 Less ending inventory (24,000 units)……….. 624,000 Cost of goods sold…………………. $2,496,000 Gross profit …………………….. $1,944,000 Selling and administrative expenses 288,000 Income from operations $1,656,000 a. Prepare a variable costing income statement, assuming that the fixed manufacturing cost were $132,000 and the variable selling and administrative expenses were $115,200. b. B. Reconcile the absorption costing income from operations of $1, 656,000 with the variable costing income from operations determined in (a).

Explanation / Answer

Answer:

Note 1: Production Units = Sales Units + Closing Inventory = 96,000 Units + 24,000 Units = 120,000 Units

Note 2: Valuation of Ending Inventory --- Under Variable Costing Method Ending Inventory is valued at current variable cost of production. i.e Value of Ending Inventory (24,000 Units) = Cost of Good Manufactured / Produced Units x Ending Inventory = $2,988,000 / 120,000 Units x 24,000 Units = $597,600

B. Reconcilation Statement (Absorption Costing iNcome from Operation with Variable Costing Income from Operations)

Note: Difference between Income from Operation under Absorption Costing and Variable Costing is arrived only due to Different treatment of Ending Inventory is suggested by both method.

As per Variable Costing, Ending Inventory is to be valued on Variable Manufacturing Cost of Production. This method does not consider Fixed Cost. Fixed Cost is treated as period cost under this method hence it is to be ignored while valuation of ending inventory.

As per Absorption Costing Method, Ending Inventory is valued on total production cost (variable + fixed manufacturing cost).

That is the reason for different value of ending inventory under different method..

Rhys Company Income Statement (Variable Costing) Particulars Amount in US$ Sales (96,000 Units @ $46.25) $4,440,000 Variable manufacturing costs: Cost of Goods Produced (120,000 Units) - Note 1 $3,120,000 Add: Opening Inventory 0 Less: Ending Inventory (24,000 Units) -Note 2 ($624,000) Cost of Goods Sold $2,496,000 Add: Variable administrative, selling and distribution oveheads $288,000 Total Variable Cost $2,784,000 Contribution (Sales - Total Variable Cost) $1,656,000 Less: Fixed Costs ($132,000) Income from Operations $1,524,000

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