Answer:
1. Using Absorption Costing
Income Statement
Sales 20,000 X $216 = $4,320,000
Less: Cost of Goods Sold (Note 1) =($1,240,000)
Gross Margin = $3,080,000
Less: Operating Expenses
Selling and Administrative Expense = ($560,000)
(Note 2)
Net Income = $2,520,000
Note:
- Cost of goods Sold = All the direct variable cost + direct fixed cost = Direct materials + Direct Labor + Direct Overhead = $20 +$28 + $6 = $54 per unit, Total = $54 X 20,000 units = $1,080,000 + Fixed cost = $160,000 = $1,240,000
- Selling And Administrative Expense = Variable + Fixed, Variable = $18 X 20,000 units = $360,000, Fixed Expenses = $200,000, Total = $560,000
2. Using Variable Statement
Sales 20,000 X $216 = $4,320,000
Less: Variable Costs
Direct Material $20 X 20,000 = ($400,000)
Direct Labor $28 X 20,000 = ($560,000)
Variable Overhead $6 X 20,000 = ($120,000)
Variable Selling Expense $18 X 20,000 = ($360,000)
Contribution Margin = $2,880,000
Less: Fixed Costs
Fixed Overhead = ($160,000)
Fixed Selling & Administrative = ($200,000)
Net Income = $2,520,000
Note: Under Variable Statement first variable expenses are deducted to get the value of contribution, and then fixed expenses are deducted to get net income, whereas in absorption costing firstly manufacturing expenses are deducted to get gross margin and then operating expenses like selling and administrative expenses are deducted to get the net income.
But Net income is same in both cases.
