Kissimmee Paint Co. reported the following data for the month of July. There wer

Question

Kissimmee Paint Co. reported the following data for the month of July. There were no beginning inventories and all units were completed (no work in process). Total Cost Number of Units Unit Cost Manufacturing costs Variable Fixed Total $ 15.50 7.00 S 22.50 S 465,000 30,000 210,000 30,000 $ 675,000 Selling and administrative expenses Variable $ 2 per unit sold Fixed $ 39,000 In the month of July, 28,000 of the 30,000 units manufactured were sold at a price of $S0 per unit (a) Prepare a variable costing income statement (b) Prepare an absorption costing income statement (e) Briefly explain why there is a difference in income from operations between the two methods.

Explanation / Answer

a)                               Variable costing income statement Sales (28000*80) 2240000 less Variable expesne variable cost of goods sold (28000*15.5) 434000 Variable selling & adm exp (28000*2) 56000 490000 Contribution margin 1750000 lessFixed expense Fixed manufacturing overhead 210,000 Fixed selling & adm expense 39,000 249,000 Net income 1,501,000 b) Absprption costing income statement Sales 2240000 less cost of goods sold (28000*22.50) 630000 Gross profit 1610000 less:Selling expense Variable selling & adm expense 56,000 Fixed selling & adm expense 39,000 95,000 Net income 1,515,000 c) there is difference because unit product cost under variable costing contains only variable costs that is direct materials,direct labor and variable manufacturing overhead ,Whereas absorption costing includes fixed manufacturing overhead besides the cost included in variable cost thus the fixed manufacturing overhead cost in ending inventory is deferred and hence the difference in reported income to two methods.

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