Answer:
When you are calculating variable costing, COGS only includes variable costs. All fixed costs are included as period costs at the end. Fixed costs are not carried forward either.
<u> Income Statement (variable costing) - J Cool Sky</u>
total sales $140 x 36,000 units sold = $5,040,000
variable COGS ($3,240,000)
variable direct costs ($60 + $22) x 36,000 = ($2,952,000)
<u>variable overhead ($8 x 36,000) ($288,000) </u>
manufacturing margin $1,800,000
<u>variable administrative and selling costs ($11 x 36,000) = ($396,000) </u>
contribution margin $1,404,000
fixed costs ($633,000)
fixed overhead = ($528,000)
<u>administrative and selling = ($105,000) </u>
net income $771,000
In order to prepare the income statement using absorption costing, we must first determine COGS = [(total variable manufacturing costs + total fixed manufacturing costs) / total output] x units actually sold
COGS = {[($60 + $22 + $8) x 44,000] + $528,000} / 44,000] x 36,000 = [($3,960,000 + $528,000) / 44,000] x 36,000 = $102 x 36,000 = $3,672,000
<u> Income Statement (absorption costing) - J Cool Sky</u>
total sales $140 x 36,000 units sold = $5,040,000
<u>COGS ($3,672,000)</u>
gross profit $1,368,000
variable administrative and selling costs $11 x 36,000 = ($396,000)
<u>fixed administrative and selling costs ($105,000)</u>
net income $867,000
The difference between both accounting methods is that variable costing includes all fixed manufacturing costs during the period and the ending inventory is carried forward only at a lower cost since it only includes variable costs. Absorption costing calculates ending inventory using the total fixed costs, that is why COGS is lower.
