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Overton Company produced 80,000 units last year. The company sold 79,000 units and there was no beginning inventory. The company chose practical activity at 80,000 units to compute its predetermined rate. Manufacturing costs are as follows:
Direct materials $596,000
Direct Labor $104,000
Variable Overhead $88,000
Fixed Overhead $228,800
Assume the sales price per unit is $18. Assume variable selling expenses are $1 per unit sold. Assume fixed selling and administrative expenses total $120,000.
REQUIRED: Prepare an Absorption-Costing Income Statement down to Operating Income (just like your Textbook does). Then prepare a Variable-Costing Income Statement in proper format down to Operating Income (just like your Textbook does). Note this exercise involves a situation where more units were made than sold.
Expert Answer
Income statement (Absorption Costing)
| Sales ($18 x 79000) | $1422000 | |
| Less: Cost of goods sold: | ||
| Opening inventory | $0 | |
| Add cost of goods manufactured (80000 x $12.71) | 1016800 | |
| Cost of goods available for sale | $1016800 | |
| Less closing inventory (1000 x $12.71) | -12710 | $1004090 |
| Gross Profit | $417910 | |
| Less: selling and administrative expenses | ||
| Variable ($1 x 79000) | $79000 | |
| Fixed | 120000 | -$199000 |
| Net operating income | $218910 |
Manufacturing expenses per unit = (Direct material + Direct labor + Variable overhead + Fixed overhead)/ No. of units produced
= ($596000 + $104000 + $88000 + $228800)/80000
= $1016800/80000
= $12.71
Income statement (Variable Costing)
| Sales | $1422000 | |
| Less variable cost of goods sold: | ||
| Opening inventory | $0 | |
| Add variable cost of goods manufactured (80000 x $9.85) |
788000 | |
| Variable Cost of goods available for sale | $788000 | |
| Less closing inventory (1000 x $9.85) | -9850 | $778150 |
| Gross contribution margin | $643850 | |
| Less: Variable selling and administrative expenses | -79000 | |
| Contribution margin | $564850 | |
| Less: Period expenses: | ||
| Fixed manufacturing overhead | 228800 | |
| Fixed selling and administrative expenses | 120000 | -348800 |
| Net operating income | $216050 |
