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4E

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Financial & Managerial Accounting
Found in: Page 870
Financial & Managerial Accounting

Financial & Managerial Accounting

Book edition 7th
Author(s) John J Wild, Ken W. Shaw, Barbara Chiappetta
Pages 1096 pages
ISBN 9781259726705

Short Answer

Question: Kenzi Kayaking, a manufacturer of kayaks, began operations this year. During this first year, the company produced 1,050 kayaks and sold 800 at a price of $1,050 each. At this first year-end, the company reported the following income statement information using absorption costing.

Sales (800 × $1,050)

$840,000

Cost of goods sold (800 × $500)

400,000

Gross margin

440,000

Selling and administrative expenses

230,000

Net income

210,000

Additional Information

a. Product cost per kayak totals $500, which consists of $400 in variable production cost and $100 in fixed production cost—the latter amount is based on $105,000 of fixed production costs allocated to the 1,050 kayaks produced.

b. The $230,000 in selling and administrative expense consists of $75,000 that is variable and $155,000 that is fixed.

1. Prepare an income statement for the current year under variable costing.

2. Explain the difference in income between the variable costing and absorption costing income statement.

Net income under variable costing is $85,000.

See the step by step solution

Step by Step Solution

Step 1: Meaning of Contribution Margin

Contribution margin refers to the amount left with a business organization after recovering all the variable costs from its sales revenue. The contribution margin is computed by deducting variable expenses from revenues.

Step 2: Preparation of income statement

Kenzi Kayaking
Variable Costing Income Statement

Particulars

Details

Amounts ($)

Sales

(800*1050)

840,000

Less: Variable costs

Production cost

(400*1050)

420,000

Variable selling and administrative expenses

75,000

Contribution margin

345,000

Less: Fixed costs

Production cost

(100*1050)

105,000

Fixed selling and administrative expenses

155,000

Net income

$85,000

Step 3: Difference in incomes

The variable costing income statement is reflecting less net income than absorption costing because variable costing approach considers the operating variable expenses while computing contribution margin.

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