Levine Manufacturing pays its production managers a bonus based on the company’s

Question

Levine Manufacturing pays its production managers a bonus based on the company’s profitability. During the two most recent years, the company maintained the same cost structure to manufacture its products.  

  

(Assume that selling and administrative expenses are associated with goods sold.)

Levine sells its products for $216 per unit.

Required

Prepare income statements based on absorption costing for 2018 and 2019.

Since Levine sold the same number of units in 2018 and 2019, why did net income increase in 2019?

Determine the costs of ending inventory for 2019.

Prepare income statements based on variable costing for 2018 and 2019.

Year Units Produced Units Sold Production and Sales 2018 4,000 4,000 2019 6,000 4,000 Cost Data Direct materials $ 30 per unit Direct labor $ 48 per unit Manufacturing overhead — variable $ 24 per unit Manufacturing overhead — fixed $ 216,000 Variable selling and administrative expenses $ 18 per unit sold Fixed selling and administrative expenses $ 120,000

Explanation / Answer

Income Statement based on Absorption costing: In Absorption costing system, all the manufacturing expenses are absorbed by unit produced. Income Statement: Particulars 2018 2019 Sale $      8,64,000 $ 8,64,000 Cost of Goods Sold: Opening Inventory $                 -   $             -   $              -   Production cost (156*4000) $     6,24,000 $ 8,28,000 Cost of goods available for sale $     6,24,000 $8,28,000 Closing Inventory 0 $      6,24,000 $ 2,76,000 $   5,52,000 Gross Profit $      2,40,000 $ 3,12,000 Marketing and administrative expenses: $      1,92,000 $   1,92,000 Variable selling and administrative expenses $        72,000 $    72,000 Fixed selling and administrative expenses $     1,20,000 $ 1,20,000 Net Profit $         48,000 $   1,20,000 Levine sold same number of units in both the years, but in 2019 there was increment in profit, reason behind this is that in 2018 company, produced 4000 units and all the units were sold but in 2019, 6000 units were produced but only 4000 units were sold. Because of production of 6000 units, per unit cost was reduced and profit was increased accordingy. Income Statement based on Variable costing: In Variable costing method, all variable expenses are deducted to calculate contribution margin and then fixed expenses are deducted to calculate net profit. Income Statement: Particulars 2018 2019 Sale $      8,64,000 $ 8,64,000 Variable Cost of Goods Sold: Opening Inventory $                 -   $             -   $              -   Production cost (102*4000) $     4,08,000 $ 6,12,000 Cost of goods available for sale $     4,08,000 $6,12,000 Closing Inventory 0 $      4,08,000 $ 2,04,000 $   4,08,000 Gross Contribution Margin $      4,56,000 $ 4,56,000 variable Marketing and administrative expenses $         72,000 $      72,000 Contribution Margin $      3,84,000 $   3,84,000 Less: Fixed Cost Fixed Manufacturing cost $      2,16,000 $   2,16,000 Fixed selling and administrative expenses $      1,20,000 $   1,20,000 Net Profit $         48,000 $      48,000 Cost of ending inventory for 2019 Opening Inventory $                 -   Add: Production made ducring the year $           6,000 Less: Units Sold during the year $           4,000 Closing Inventory for 2019 $          2,000 Reconciliation of net profit: Net operating profit as per variable costing menthod $   48,000.00 $    48,000.00 Fixed manufacturing overhead cost deferred in inventory $                 -   $    72,000.00 Net Operating income as per absorption costing $   48,000.00 $1,20,000.00

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