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6 June, 17:02

Sims Company, a manufacturer of tablet computers, began operations on January 1, 2017. Its cost and sales information for this year follows. Manufacturing costs Direct materials $ 40 per unit Direct labor $ 60 per unit Overhead costs for the year Variable overhead $ 3,000,000 Fixed overhead $ 7,000,000 Selling and administrative costs for the year Variable $ 770,000 Fixed $ 4,250,000 Production and sales for the year Units produced 100,000 units Units sold 70,000 units Sales price per unit $ 350 per unit 1. Prepare an income statement for the year using variable costing. 2. Prepare an income statement for the year using absorption costing. 3. Under what circumstance (s) is reported income identical under both absorption costing and variable costing?

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  1. 6 June, 17:24
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    1. Prepare an income statement for the year using variable costing.

    Sales ($ 350 * 70,000) $ 24,500,000

    Less Cost of Sales $9,100,000

    Opening Stock of Finished Goods 0

    Add Manufacturing Cost of Finished Goods ($130 * 100,000) $13,000,000

    Less Closing Stock of Finished Goods ($130*30,000) ($3,900,000)

    Contribution $15,400,000

    Less Expenses

    Fixed Manufacturing Overheads ($ 7,000,000)

    Selling and administrative costs:

    Variable ($ 770,000)

    Fixed ($4,250,000)

    Net Income $3,380,000

    2. Prepare an income statement for the year using absorption costing.

    Sales ($ 350 * 70,000) $ 24,500,000

    Less Cost of Sales $14,000,000

    Opening Stock of Finished Goods 0

    Add Manufacturing Cost of Finished Goods ($200 * 100,000) $20,000,000

    Less Closing Stock of Finished Goods ($200*30,000) ($6,000,000)

    Gross Profit $10,500,000

    Less Expenses

    Selling and administrative costs:

    Variable ($ 770,000)

    Fixed ($4,250,000)

    Net Income $5,480,000

    3. Under what circumstance (s) is reported income identical under both absorption costing and variable costing

    When Production is Equal to Sales

    Explanation:

    The Variable Costing and The Absorption Costing Differ in two aspects. That is the Accumulation of Product Costs and the Accumulation of Period Costs.

    Product Costs

    Variable Costing = Direct Labor + Direct Materials + Variable Overheads

    = $ 60 + $40 + $ 30

    = $130

    Absorption Costing = Direct Labor + Direct Materials + Variable Overheads + Fixed Manufacturing Overheads

    = $ 60 + $40 + $ 30 + $70

    = $200

    Periodic Cost

    Variable Costing = Fixed Manufacturing Overheads + Non - Manufacturing Overheads

    Absorption Costing = Non - Manufacturing Overheads

    Units of Closing Stock Calculation:

    Production - Sales

    100,000-70,000

    30,000
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