Question 1. 1. (TCO D) Hanks Company produces a single product. Operating data f

Question

Question 1. 1. (TCO D) Hanks Company produces a single product. Operating data for the company and its absorption costing income statement for the last year is presented below. Units in beginning inventory..................................................0 Units produced....................................................................9,000 Units sold.............................................................................8,000 Sales......................................................... .........................$80,000 Less cost of goods sold: Beginning inventory.............................................. 0 Add cost of goods manufactured..................54,000 Goods available for sale...................................54,000 Less ending inventory........................................6,000 Cost of goods sold.............................................................48,000 Gross margin........................................................................32,000 Less selling and admin. expenses.....................................28,000 Net operating income.........................................................$4,000 Variable manufacturing costs are $4 per unit. Fixed manufacturing overhead totals $18,000 for the year. The fixed manufacturing overhead was applied at a rate of $2 per unit. Variable selling and administrative expenses were $1 per unit sold. Required: Prepare a new income statement for the year using variable costing. Comment on the differences between the absorption costing and the variable costing income statements

Explanation / Answer

Sales: 80,000

Variable Cost of goods sold= Cost of goods manufactured/available for sale- closing inventory

=(9000*4)- (1000*4)= 32000

Variable selling and Admin cost=8000*1= 8000

Fixed factory OHD= 18000

Fixed Selling and admin cost=28000-8000=20000

Net Profit= 80000-32000-8000-18000-20000=2000

In variable costing method, closing inventory is values at variable cost only while in absorption costing the inventory is valued at a higher price because it includes portion of Fixed Cost. When Closing Inventory is higher, the profit is higher. As such, the profit shown in Absorption costing is higher that that calculated using variable costing method. Following is the Profit Reconciliation Statement

Absorption Costing profit= 4000

Less Fixed Cost element in closing inventory= 2000

Variable Costing profit= 2000

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