Estimated Income Statements, using Absorption and Variable Costing Prior to the
ID: 2603952 • Letter: E
Question
Estimated Income Statements, using Absorption and Variable Costing
Prior to the first month of operations ending October 31 Marshall Inc. estimated the following operating results:
The company is evaluating a proposal to manufacture 22,400 units instead of 20,000 units, thus creating an Inventory, October 31 of 2,400 units. Manufacturing the additional units will not change sales, unit variable factory overhead costs, total fixed factory overhead cost, or total selling and administrative expenses.
a. 1. Prepare an estimated income statement, comparing operating results if 20,000 and 22,400 units are manufactured in the absorption costing format. If an amount box does not require an entry leave it blank or enter “0”.
a. 2. Prepare an estimated income statement, comparing operating results if 20,000 and 22,400 units are manufactured in the variable costing format. If an amount box does not require an entry leave it blank or enter “0”.
b. What is the reason for the difference in income from operations reported for the two levels of production by the absorption costing income statement?
The increase in income from operations under absorption costing is caused by the allocation of ___ overhead cost over a number ____ of units. Thus, the cost of goods sold is ____. The difference can also be explained by the amount of ____ overhead cost included in the ______ inventory.
Sales (20,000 x $71) $1,420,000 Manufacturing costs (20,000 units): Direct materials 852,000 Direct labor 202,000 Variable factory overhead 94,000 Fixed factory overhead 112,000 Fixed selling and administrative expenses 30,500 Variable selling and administrative expenses 36,800Explanation / Answer
Answer a-1. Calculation of Cost per Unit Under Absorption Costing 20,000 Units Manufactured 22,400 Units Manufactured Direct Material 42.60 42.60 Direct Labor 10.10 10.10 Variable Factory Overhead 4.70 4.70 Fixed Factory Overhead 5.60 5.00 Total Cost per Unit 63.00 62.40 Fixed Factory Overhead per Unit: 20,000 Units Manufactured = $112,000 / 20,000 Units = $5.60 per Unit 22,400 Units Manufactured = $112,000 / 22,400 Units = $5 per Unit Note: Selling and administrative expenses (both variable and fixed) are not relevant for the computation of unit product cost in both absorption costing & variable costing. Marshall Inc. Absorption Costing Income Statement For the Month Ending October 31 20,000 Units Manufactured 22,400 Units Manufactured Sales 1,420,000.00 1,420,000.00 (20,000 Nos X $71) (20,000 Nos X $71) Cost of Goods Sold: Cost of Goods Manufactured 1,260,000.00 1,397,760.00 (20,000 Nos X $63) (22,400 Nos X $62.40) Less: Inventory, October 31 - 149,760.00 (2,400 Nos X $62.40) Total Cost of Goods Sold 1,260,000.00 1,248,000.00 Gross Profit 160,000.00 172,000.00 Selling & Administrative Expenses Fixed Selling & Administrative Expenses 30,500.00 30,500.00 Variable Selling & Administrative Expenses 36,800.00 36,800.00 Total Selling & Administrative Expenses 67,300.00 67,300.00 Income From Operations 92,700.00 104,700.00 Answer a-2. Calculation of Cost per Unit Under Variable Costing 20,000 Units Manufactured 22,400 Units Manufactured Direct Material 42.60 42.60 Direct Labor 10.10 10.10 Variable Factory Overhead 4.70 4.70 Total Cost per Unit 57.40 57.40 Marshall Inc. Variable Costing Income Statement For the Month Ending October 31 20,000 Units Manufactured 22,400 Units Manufactured Sales 1,420,000.00 1,420,000.00 (20,000 Nos X $71) (20,000 Nos X $71) Cost of Goods Sold: Cost of Goods Manufactured 1,148,000.00 1,285,760.00 (20,000 Nos X $57.40) (22,400 Nos X $57.40) Less: Inventory, October 31 - 137,760.00 (2,400 Nos X $57.40) Total Cost of Goods Sold 1,148,000.00 1,148,000.00 Manufacturing Margin 272,000.00 272,000.00 Variable Selling & Administrative Expenses 36,800.00 36,800.00 Contribution Margin 235,200.00 235,200.00 Fixed Costs: Fixed Factory Overhead 112,000.00 112,000.00 Fixed Selling & Administrative Expenses 30,500.00 30,500.00 Total Fixed Costs 142,500.00 142,500.00 Income From Operations 129,500.00 129,500.00 Answer b. The increase in income from operations under absorption costing is caused by the allocation of Fixed overhead cost over a number 22,400 of units. Thus, the cost of goods sold is $1,248,000. The difference can also be explained by the amount of Fixed overhead cost included in the Ending inventory.
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