Question

Jackson Company produces plastic that is used for injection-molding applications such as gears for small motors. In 2016, the first year of operations, Jackson produced 4,100 tons of plastic and sold 3,280 tons. In 2017, the production and sales results were exactly reversed. In each year, the selling price per ton was $2,400, variable manufacturing costs were 17% of the sales price of units produced, variable selling expenses were 11% of the selling price of units sold, fixed manufacturing costs were $3,075,000, and fixed administrative expenses were $500,000. a. Prepare income statements for each year using variable costing. b. Prepare income statements for each year using absorption costing. c. Reconcile the differences each year in net income under the two costing approaches.

Answer 1

Answer:

a.Income Statement using variable costing

                                                                     2016                 2017

Sales                                                     $7,872,000      $9,840,000

Less Cost of Sales                              ($1,338,240)      ($1,672,800)

Opening Stock                                            $0               $334,560

Add Cost of Goods Manufactured      $1,672,800      $1,338,240

Less Closing Stock                               ($334,560)             $0

Contribution                                        $6,533,760       $8,167,200

Less Expenses :

Fixed manufacturing costs                ($3,075,000)     ($3,075,000)

Selling Expenses : Variable                  ($862,920)      ($1,082,400)

Selling Expenses : Fixed                       ($500,000)       ($500,000)

Net Income / (loss)                               $2,095,840       $3,509,800

b.Income Statement using  absorption costing

                                                                     2016                 2017

Sales                                                     $7,872,000      $9,840,000

Less Cost of Sales                              ($3,798,240)      ($5,362,800)

Opening Stock                                            $0               $949,560

Add Cost of Goods Manufactured      $4,747,800      $4,413,240

Less Closing Stock                               ($949,560)             $0

Gross Profit                                           $4,073,760          $4,477,200

Less Expenses :

Selling Expenses : Variable                  ($862,920)      ($1,082,400)

Selling Expenses : Fixed                       ($500,000)       ($500,000)

Net Income / (loss)                                 $2,710,840       $2,894,800

c. Reconciliation of Absorption costing Net Income to variable costing profit

                                                                                   2016                      2017

Absorption Costing Net Income                           $2,710,840       $2,894,800

Fixed Manufacturing  Cost in Opening Stock             $0                $615,000

Fixed Manufacturing Cost in Closing Stock         ($615,000)               $0

Variable Costing Net Income                               $2,095,840       $3,509,800

Explanation:

Part a.

Under Variable Costing, Only Variable Manufacturing Costs are treated as Product costs. Fixed Manufacturing costs and All Non-Manufacturing Costs are treated as period costs.

Part b

Under Absorption Costing, Both Variable Manufacturing Costs  and  Fixed Manufacturing costs are treated as Product costs. All Non-Manufacturing Costs are treated as period costs.

Part c.

The difference between the Net Income under Absorption Costing and Variable Costing is due to Fixed Manufacturing Costs that are deferred in Inventory. This needs to be reconciled accordingly.