Absorption and Variable Costing Income Statements for Two Months and Analysis Du

Question

Absorption and Variable Costing Income Statements for Two Months and Analysis During the first month of operations ended May 31, 2015, T-shirt Express Company produced 28,600 designer T-shirts, of which 26,600 were sold. Operating data for the month are summarized as follows: Sales Manufacturing costs: $180,880 Direct materials Direct labor Variable manufacturing cost Fixed manufacturing cost $111,540 28,600 14,300 11,440 165,880 Selling and administrative expenses: Variable $7,980 Fixed 5,830 13,810 During June, T-shirt Express Company produced 24,600 designer T-shirts and sold 26,600 T-shirts. Operating data for June are summarized as follows: Sales Manufacturing costs: $180,880 Direct materials Direct labor Variable manufacturing cost Fixed manufacturing cost $95,940 24,600 12,300 11,440 144,280 Selling and administrative expenses

Explanation / Answer

In a company you have to prepare statement showing profit or loss at the end of each month. It can be prepared using any one of the understated two methods:

1. Absorption costing: It does not differentiate between variable cost and fixed cost. Steps are as follows:

a. All maufacturing costs of quantity produced are taken together. From this figure add opening inventory. Then deduct closing unsold inventory. You will get cost of goods sold (COGS).

b. Deduct COGS from total sales. Balance is gross profit.

c. From gross profit deduct all selling and admiistrative cost to get operating net profit.

Note that main point in this system is the valuation of end inventory.It is valued at manufacturing cost. It includes direct material cost, direct labor cost and all manufacturing cost including fixed elements..

2. Variable costing: This method differentiates between fixed and variable cost. Variable costs are directly linked with the quantity manufactured. Fixed costs will not change. It is payable even at zero output.Steps are as follows:

a. Estimate stock value on the basis of variable maufacturing cost. It will include direct material, direct labor and variable manufacturing cost.

b. Ascertain total variable cost of goods sold. It is the sum of opening stock and all variable costs of goods maufactured in the month. From this total deduct closing unsold stock.

c. Deduct total variable cost of goods sold from total sales. Balance is manufacturing margin.

d. Now deduct variable portion of admiistrative and selling cost. Balance is total contribution.

e. Finally consider all fixed costs. Deduct it from total contribution to get net operating profit.

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In this problem you have to prepare income statement of Jue, based on absorption costing and marginal costing. Consider understated workings before preparing them.

1. Quantity of Inventory:

2. Cost per unit of May:

Note: Inventory value per unit under absorption costing is $5.80. Under variable costing it will be $5.40

         Only computation has been made for May. June is not required as end invetory is nil in June.

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T-shirt express Company

Absorption costing Income statement

for the month of June 2015

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T-shirt express Company

Variable costing Income statement

for the month of June 2015

Note that income from operation in two methods are different. It is due to fixed manufacturing overhead which is not included in variable costing.

Descriptions May June 1. Inventory on first day of the month 0 2,000 2. Quantity manufactured 28,600 24,600 3. Total availability [1+2] 28,600 26,600 4.Quantity sold 26,600 26,600 5 Inventory at the end of the month [3-4] 2,000 NIL

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