Question

Exercise 19-9 Income statement under absorption costing and variable costing LO P1, P2 IThe following information applies to the questions displayed below.J Cool Sky reports the following costing data on its product for its first year of operations. During this first year, the company produced 44,000 units and sold 36.000 units at a price of $140 per unit. Manufacturing costs 60 Direct materials per unit Direct labor per unit 22 Variable overhead per unit $528,000 Fixed overhead for the year Selling and administrative cost Variable selling and administrative cost per unit 105,000 Fixed selling and administrative cost per year

Answer 1

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.        

              Income Statement (variable costing) - J Cool Sky

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)

variable overhead ($8 x 36,000)                       ($288,000)                               

manufacturing margin                                                              $1,800,000

variable administrative and selling costs ($11 x 36,000) =     ($396,000)    

contribution margin                                                                   $1,404,000

fixed costs                                                                                  ($633,000)

fixed overhead =                                               ($528,000)

administrative and selling =                              ($105,000)                            

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

          Income Statement (absorption costing) - J Cool Sky

total sales $140 x 36,000 units sold =                                   $5,040,000

COGS                                                                                      ($3,672,000)

gross profit                                                                                $1,368,000

variable administrative and selling costs $11 x 36,000 =       ($396,000)    

fixed administrative and selling costs                                      ($105,000)

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.