Estimated Income Statements, using Absorption and Variable Costing Prior to the

Question

Estimated Income Statements, using Absorption and Variable Costing Prior to the first month of operations ending October 31 Narshall Inc. estimated the following operating results: Sales (18,400 x s66) Manufacturing costs (18,400 units): 1,214,40D Direct materials Direct labor varlable factory overhead Fixed factory overhead Fixed selling and administrative expenses Veriable selling and administrative expenses 726,800 172.960 80,960 95680 26,000 31,500 The company is evaluating a proposal to manufacture 20,800 units instead of 18,400 units, thus creating an Inventory, October 31 of 2,400 units. Manufacturing the additional units will not change sales, unit vanable factory overhead costs, total fxed factory ovorhoad cost, or total selling and administrative axpenses a. 1. Prepare an estimated Income statement, comparing operating results If 18,400 and 20,B0D unts are manufactured In the abeorption costing format. If an amount box does not require an entry leave it blank or enter D Marshall Inc. Absorption Costing Income Statement For the Month En October 31 15,400 Units Manufactured 20,500 uns Manufsctured Sales 1.21440o Cost of goods sold: Cost of goods manufactured Inventory, October 31 Total cost of goods sold Gross profit Selling and administrative Income from cperations

Explanation / Answer

Req A-1 ABSORPTION COSTING INCOME STATEMENT 18400 UNITS 20800 UNITS Sales revenue 1214400 1214400 Less: Cost of Goods sold Cost of goods manufactured 1076400 1204320 Less: ending Inventory 0 138960 Cost of Goods sold 1076400 1065360 Gross margin 138000 149040 Selling and admin expense 57500 57500 Net Income 80500 91540 Note: cost of goods manufactured and ending inventory in 20800 units is as follows: Variable cost of manufactured (980720/18400*20800) 1108640 Fixed cost 95680 Total cost of manufacture of 20800 units 1204320 Ending Inventory (1204320/20800*2400) 138960 Req A-2 Income statement 18400 UNITS 20800 UNITS Sales 1214400 1214400 Less: variable cost of goods sold variable cost of goods mnaufactured 980720 1108640 Less: Ending Inventory 0 127920 Variable cocst of goods sold 980720 980720 manufacturing margin 233680 233680 Variable selling and admin expense 31500 31500 Contribution 202180 202180 Les: Fixed cost fixed manufacturing OH 95680 95680 Fixed selling expense 26000 26000 Net income 80500 80500 The increasse in income under Absorption costing is caused of allocation of fixed factry overheads over a more number of units. Thus the cost of goods sold is less. The difference can also be explained the fixed overhead cost included in Ending inventory.

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