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Financial & Managerial Accounting
Found in: Page 876
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

Azule Company produces a single product. Its income statements under absorption costing for its first two years of operation follow.

2016

2017

Sales ($35 per unit)

$1,925,000

$2,275,000

Cost of goods sold ($26 per unit)

1,430,000

1,690,000

Gross margin

495,000

585,000

Selling and administrative expenses

465,000

495,000

Net income

$30,000

$90,000

Additional information

  1. Sales and production data for these first two years follow:

2016

2017

Units produced

60,000

60,000

Units sold

55,000

65,000

  1. Its variable cost per unit and total fixed costs are unchanged during 2016 and 2017. Its $26 per unit product cost consists of the following.

Direct materials

$4

Direct labor

6

Variable overhead

8

Fixed overhead ($480,000/60,000 units)

8

Total product cost per unit

$26

  1. Its selling and administrative expenses consist of the following.

2016

2017

Variable selling and administrative expenses

($3 per unit)

$165,000

$195,000

Fixed selling and administrative expenses

300,000

300,000

Total selling and administrative expenses

$465,000

$495,000

Required

1. Prepare this company’s income statements under variable costing for each of its first two years.

2. Explain any difference between the absorption costing income and the variable costing income for these two years.

The net loss for the year 2016 is $(10,000).

Net income for the year 2017 is $130,000.

See the step by step solution

Step by Step Solution

Step 1: Meaning of Absorption Costing

Absorption costing is one of the methods used in the cost accounting branch to determine the price of a product produced. It considers both direct and indirect expenses associated with the production of a product.

Step 2: Preparation of income statement

Azule Company
Variable Costing Income Statement
For the year ended 2016

Particulars

Details

Amounts ($)

Sales

55000*35

$1,925,000

Less: Variable costs

Direct materials

55000*4

220,000

Direct labor

55000*6

330,000

Variable overheads

55000*8

440,000

Variable selling and administrative expenses

165,000

Contribution margin

$770,000

Less: Fixed costs

Fixed overhead

480,000

Fixed selling and administrative expenses

300,000

Net loss

$(10,000)

Azule Company
Variable Costing Income Statement
For the year ended 2016

Particulars

Details

Amounts ($)

Sales

65000*35

$2,275,000

Less: Variable costs

Direct materials

65000*4

260,000

Direct labor

65000*6

390,000

Variable overheads

65000*8

520,000

Variable selling and administrative expenses

195,000

Contribution margin

$910,000

Less: Fixed costs

Fixed overhead

480,000

Fixed selling and administrative expenses

300,000

Net income

$130,000

Step 3: Explanation of the difference

The difference between the incomes of 2016 and 2017 is arising due to the fixed manufacturing overheads cost.

For the year 2016:

Reconciliation of variable costing income/(loss)

Particulars

Details

Amounts ($)

Net loss from variable costing

$(10,000)

Add: Fixed overhead cost deferred in ending inventory

5000*8

40,000

Net income from absorption costing

$30,000

For the year 2017:

Reconciliation of variable costing income/(loss)

Particulars

Details

Amounts ($)

Net income from variable costing

$130,000

Less: Fixed overhead cost deferred in beginning inventory

5000*8

(40,000)

Net income from absorption costing

$90,000

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