Answer:
1. Absorption Costing Income Statement
For the month ended May 31, 2016
Sales $10,800,000
<u>Cost of goods sold</u>
Beginning inventory -
Cost of goods manufactured $9,600,000
Ending Inventory <u>$960,000</u>
Cost of goods sold <u>$8,640,000</u>
Gross margin $2,160,000
<u>Selling and administrative expenses</u>
$1,080,000 + $180,000 <u>$1,260,000</u>
Income from operation <u>$900,000</u>
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2. Variable Costing Income Statement
For the month ended May 31, 2016
Sales $10,800,000
<u>Variable cost of goods sold</u>
Beginning Inventory -
Variable cost of goods manufactured $9,280,000
Ending Inventory $928,000
Variable cost of goods sold <u>$8,352,000</u>
Manufacturing margin $2,448,000
Variable selling and administrative <u>$1,080,000</u>
expenses
Contribution margin $1,368,000
<u>Fixed Cost:</u>
Fixed manufacturing cost $320,000
Fixed selling and administrative <u>$180,000</u>
expenses
Total fixed cost <u>$500,000</u>
Income from operation <u>$868,000</u>
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3. The reason for difference of amount for income from operation is $32,000 ($900,000 - $868,000). It is due to fixed manufacturing cost which is included for ending inventory under absorption costing (320,000 / 80,000 * 8,000). Hence, income under absorption costing is higher by $32,000 as compared to income under variable costing.
