Question

On June 30, the end of the first month of operations, Tudor Manufacturing Co. prepared the following income statement, based on the variable costing concept:
Sales (420,000 units) $7,450,000
Variable cost of goods sold:
Variable cost of goods manufactured (500,000 units x $14 per unit) $7,000,000
Less ending inventory (80,000 units x $14 per unit) 1,120,000
Variable cost of goods sold 5,880,000
Manufacturing margin $1570000
Variable selling and administrative expenses 80,000
Contribution margin $1490,000
Fixed costs:
Fixed manufacturing costs $160,000
Fixed selling and administrative expenses 75,000 235,000
Income from operations $1255,000

Required:
a. Prepare an absorption costing income statement.
b. Reconcile the variable costing income from operations of $1,255,000 with the absorption costing income from operations determined in (a).

Answer 1

Answer:

A. $1,280,600

B. $1,280,600

Explanation:

A. Preparation of an absorption costing income statement.

Tudor Manufacturing Co.

Absorption Costing Income Statement

For the Month Ended June 30, 2014

Sales (420,000 units) $7,450,000

Cost of goods manufactured $7,160,000

(500,000 units x $14.32 per unit)

($160,000 / 500,000 units = $0.32 per unit)

($14 per unit + $0.32 per unit = $14.32 per unit)

Less ending inventory $1,145,600

(80,000 units x $14.32 per unit)

Cost of goods sold $6,014,400

Gross profit $1,435,600

($7,450,000 - $6,014,400)

Selling and administrative expenses:

Variable selling and administrative expenses $80,000

Fixed selling and administrative expenses $75,000 $155,000

Income from operations $1,280,600

($1,435,600 - $155,000)

Therefore the absorption costing income statement will be $1,280,600

B.Calculation to Reconcile the variable costing income from operations of $1,255,000 with the absorption costing income from operations determined in (a)

First step is to calculate ending inventory difference

Ending inventory difference = $1,145,600 - $1,120,000

Ending inventory difference = $25,600

Now let Reconcile the variable costing income from operations

Reconciliation of Variable Costing and Absorption Costing Incomes from Operations

Variable costing income from operations $1,255,000

Add: Difference between absorption costing and variable costing ending inventories $25,600

Absorption costing income from operations $1,280,600

($1,255,000+$25,600)

Therefore the variable costing income from operations of $1,255,000 with the absorption costing income from operations determined in (a) will be $1,280,600