My Sheep’s Wool Blanket Company produces wool blankets that it sells for $350 ea

Question

My Sheep’s Wool Blanket Company produces wool blankets that it sells for $350 each.

My Sheep’s Wool Blanket Company began operations on January 1, 2015. The company uses actual costs and does not generally carry Work in Process Inventories at the end of the year. Costing for the first three years of operations is given below.

Variable Costs for the first three years of operation (2015, 2016 & 2017):

                                                               Per Blanket

Direct Material                                           $125

Direct Labor                                               $100

Variable Overhead                                      $30

Variable Selling Expense                              $10

Fixed Costs for each of the first three years of operation (2015, 2016 & 2017):

Fixed Overhead                                          $150,000

Total Fixed Selling and Administrative Costs    $250,000

The Selling Price is $350 per blanket for all three years. Production and Sales figures (In number of blankets) for the three years are below.

                                    2015                    2016                     2017

Production                      5,000                    10,000                   6,250

Sales                             4,000                    7,000                  10,000

My Sheep’s Wool Blanket uses the FIFO method to assign cost to any units left in Ending Finished Goods Inventory.

Tasks:

A.     

1. Prepare, in good form, two Income Statements for the year ending December 31, 2016: One using Absorption costing and one using Variable Costing. Use the formats that I used in the class example for Chapter 6.

2. Then, prepare a Reconciliation to explain the difference in the Net Operating Income figures. Again, use the format that I used in the class example.

B.      In a management meeting at the end of December 2017, you are provided with a Variable Income Statement for year ending December 31, 2017. The Variable Income Statement showed Net Operating Income of $450,000. WITHOUT DOING ANY INCOME STATEMENTS FOR THE YEAR ENDING DECEMBER 31, 2017, prepare a Reconciliation for that year (2017)) that will give us the Net Operating Income (Loss) figure using Absorption Costing. In other words, what was the Net Operating Income (Loss) for the year ending December 31, 2017? You are ONLY TO PREPARE A RECONCILIATION STATEMENT.

Explanation / Answer

Construct The Absorption Costing Unit Product Cost 2016 Direct Material 125 Direct labour 100 Variable Manufacturing overheads 30 Fixed Manufacturing overheads 15.00 Absorption costing unit prroduct cost 270.00 Construct the Absorption Costing Income Statement Under FIFO 2016 Sales $2,450,000 Cost of Goods sold 1905000 Gross Margin $545,000 Selling and distribution expense 320,000 Net operating income 225,000 Compute the Variable costing Unit Product cost Year 1 Direct Material 125 Direct labour 100 Variable Manufacturing overheads 30 Variable costing unit prroduct cost 255 Construct The Variable Costing Income Statement under FIFO YEAR 1 Sales 2450000 Less: Variable cost    variable cost of goods sold 1,785,000    Variable selling expense 70,000 Contribution margin 595000 Fixed expense:    Fixed Manufacturing overheads 150000    Fixed selling expense 250000 Net operating Income 195000 RECONCILIATION STATEMENT: Net income as per Variable costing 195000 Less: Fixed OH released in Beginning Inventory (1000 units @ 30) 30000 Add: Fixed OH deferred in Ending Inventory (4000 units @ 15) 60000 Net Income as per Aabsorption costing 225000 Req 2: RECONCILIATION STATEMENT Net Income as per variable costing 450000 Less: Fixed OH released in beginning inventory (3750 units @$15) 56250 Net income as per absorption costing 393750

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