Answer:
Happy Trails
Income statement using variable costing
$ $
Sales 1,900,500
Less: Variable costs:
Direct material (27,000 units x $15) 405,000
Direct labour (27,000 units x $15) 405,000
Variable overhead (27,000 units x $3) <u>81,000
</u>
891,000
Less: Closing stock (8,000 units x $33) <u>264,000</u>
627,000
Add: Variable selling and administrative <u>133,000</u> <u>760,000
</u>
Contribution 1,140,500
Less: Fixed cost:
Fixed production cost (27,000 x $25) 675,000
Fixed selling and administrative expenses 300,000 <u>975,000
</u>
Net profit <u>165,500</u>
Profit reconciliation statement
Closing stock Net profit
$ $
Absorption costing 464,000 365,500
Less: Marginal costing <u>264,000</u> <u>165,500
</u>
Difference <u>200,000</u> <u> 200,000</u>
The difference of $200,000 in net profit is as a result of $200,000 difference in closing inventory.
Explanation:
In variable costing, variable costs are deducted from sales so as to obtain contribution margin. Net profit is the difference between contribution and fixed costs. Closing stock is the difference between production units and sales units. Closing stock is valued at marginal cost per unit in variable costing. Marginal cost per unit is the aggregate of all variable cost per unit.
