Exercise 19-3 Income reporting under absorption costing and variable costing LO

Question

Exercise 19-3 Income reporting under absorption costing and variable costing LO P Sims Company, follows. a manufacturer of tablet computers, began operations on January 1, 2017. Its cost and sales information for this ye Manufacturing costs Direct materials Direct labor Overhead costs for the year 40 per unit 60 per unit Variable overhead $3,000,000 $7,000,000 Fixed overhead Selling and administrative costs for the year Variable Fixed s 770,000 4,250,000 Production and sales for the year Units produced Units sold 100,000 unita 70.000 unito 9350 per unit Sales price per unit 1. Prepare an income statement for the year using variable costing. 2. Prepare an income statement for the year using absorption costing 3. Under what circumstance(s) is reported income identical under both absorption costing and variable costing?

Explanation / Answer

Requirement 1

Requirement 3

If units sold and units produced are same, there would be identical reported income under both absorption costing and variable costing.

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Variable costing Income statement Unit produced 100000 Unit Sales 70000 Sales Revenue 24500000 Variable cost of goods manufactured Opening inventory 0 Direct Materials 4000000 Direct Labor 6000000 Variable manufacturing overhead 3000000 Variable cost of goods available for sale 13000000 Less : Closing Inventory 3900000 Cost of goods sold 9100000 Gross Contribution Margin 15400000 Less : Variable selling and administrative 770000 Contribution Margin 14630000 Fixed expenses Fixed manufacturing overhead 7000000 Fixed selling and administrative expenses 4250000 Total fixed expenses 11250000 Net Operating Income(Loss) 3380000 Requirement 2

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