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 <em> $0 </em> <em> $334,560</em>
Add Cost of Goods Manufactured <em>$1,672,800 </em> <em>$1,338,240</em>
Less Closing Stock <em> ($334,560) </em> <em> $0</em>
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 <em> $0 </em> <em> $949,560</em>
Add Cost of Goods Manufactured <em>$4,747,800 </em> <em>$4,413,240</em>
Less Closing Stock <em> ($949,560) </em> <em> $0</em>
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.
