Navaroli Company began operations on January 5, 2015. Cost and sales information
ID: 2403035 • Letter: N
Question
Navaroli Company began operations on January 5, 2015. Cost and sales information for its first two calendar years of operations are summarized below.
Manufacturing Costs: Direct materials $80 per unit Direct labor $120 per unit Factory overhead costs: Variable overhead $30 per unit Fixed overhead $14,000,000 Nonmanufacturing costs Variable selling and administrative $10 per unit Fixed selling and administrative $8,000,000 Production and sales data 2015 2016 Units produced 200,000 units 80,000 Units sold 140,000 140,000 Units in ending inventory 60,000 0 Sales price per unit $600 $600
Required
1. Prepare an income statement for the company for 2015 under absorption costing.
2. Prepare an income statement for the company for 2015 under variable costing.
3. Explain the source(s) of the difference in reported income for 2015 under the two costing methods.
4. Prepare an income statement for the company for 2016 under absorption costing.
5. Prepare an income statement for the company for 2016 under variable costing.
6. Prepare a schedule to convert variable costing income to absorption costing income for the years 2015 and 2016.
Explanation / Answer
Answer
1.
Unit (Variable Costing)
Direct Material
80
Direct Labor
120
Variable Manufacturing Overhead
30
Per unit Cost
230
Income Statement (Variable Costing)
Year 1
Year 2
Detail
Net
Detail
Net
Sales (@ 600 per unit)
84,000,000
84,000,000
Less: Cost of Goods Sold
Opening Inventory
-
13,800,000
Add: Cost of goods Manufactured
46,000,000
18,400,000
Less: Closing Inventory
(13,800,000)
(60,000 Units * $230)
32,200,000
32,200,000
Gross Contribution Margin
51,800,000
51,800,000
Less: Variable Selling and Adm. Expenses
(1,400,000)
(140,000 * $10)
1,400,000
Contribution Margin
50,400,000
50,400,000
Less: Fixed Cost
Fixed Manufacturing Cost
14,000,000
14,000,000
Fixed Selling and Adm. Expenses
8,000,000
22,000,000
8,000,000
22,000,000
Net Operating Income
28,400,000
28,400,000
Unit Cost(Absorption Costing)
Year 1
Year 2
Direct Material
80
80
Direct Labor
120
120
Variable Manufacturing Overhead
30
30
Fixed Manufacturing per unit
70.0
($14,000,000 / 200,000 Units)
175.0
($14,000,000 / 80,000 Units)
Per unit Cost
300.0
405.0
Income Statement
Year 1
Year 2
Detail
Net
Detail
Net
Sales
84,000,000
84,000,000
Less: Cost of Goods Sold
Opening Inventory
-
18,000,000
Add: Cost of goods Manufactured
60,000,000
30,375,000
Less: Closing Inventory
(18,000,000)
(60,000 * $300)
42,000,000
-
30,375,000
Gross Profit
42,000,000
53,625,000
Less: Selling and Administrative Cost
Variable Selling and Adm. Expenses
1,400,000
1,400,000
Fixed Selling and Adm. Expenses
8,000,000
9,400,000
8,000,000
9,400,000
Net Operating Income
32,600,000
44,225,000
3.
The difference between two costing methods in 2015 is due to the cost of Fixed Manufacturing Cost included in the Closing stock while calculating Income Under Variable costing.
As we know that Fixed Manufacturing cost per unit is $70 per unit ($14,000,000 / 200,000 Units) but while calculating profit under Variable costing we didn’t considered this cost while calculating Closing stock so the profit is Under-valued.
6.
Profit under Variable costing in 2015
28,400,000
Fixed Mfg. cost included in Closing Stock
($70 per unit * 60,000 Units)
4,200,000
Profit as per Absorption Costing in 2015
32,600,000
Profit under Variable costing in 2016
28,400,000
Fixed Mfg. cost included in Opening Stock
($70 per unit * 60,000 Units)
(4,200,000)
Profit as per Absorption Costing in 2016
24,200,000
Unit (Variable Costing)
Direct Material
80
Direct Labor
120
Variable Manufacturing Overhead
30
Per unit Cost
230
Income Statement (Variable Costing)
Year 1
Year 2
Detail
Net
Detail
Net
Sales (@ 600 per unit)
84,000,000
84,000,000
Less: Cost of Goods Sold
Opening Inventory
-
13,800,000
Add: Cost of goods Manufactured
46,000,000
18,400,000
Less: Closing Inventory
(13,800,000)
(60,000 Units * $230)
32,200,000
32,200,000
Gross Contribution Margin
51,800,000
51,800,000
Less: Variable Selling and Adm. Expenses
(1,400,000)
(140,000 * $10)
1,400,000
Contribution Margin
50,400,000
50,400,000
Less: Fixed Cost
Fixed Manufacturing Cost
14,000,000
14,000,000
Fixed Selling and Adm. Expenses
8,000,000
22,000,000
8,000,000
22,000,000
Net Operating Income
28,400,000
28,400,000
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