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Q7E

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Financial & Managerial Accounting
Found in: Page 871
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

Oak Mart, a producer of solid oak tables, reports the following data from its second year of business.

Sales price per unit

$320 per unit

Manufacturing costs this year

Units produced this year

115,000 units

Direct materials

$40 per unit

Units sold this year

118,000 units

Direct labor

$62 per unit

Units in beginning-year inventory

3,000 units

Overhead costs this year

Beginning inventory costs

Variable overhead

$3,220,000

Variable (3,000 units x $135)

$405,000

Fixed overhead

$7,400,000

Fixed (3,000 units x $80)

240,000

Selling and administrative costs this year

Total

$645,000

Variable

$1,416,000

Fixed

4,600,000

1. Prepare the current-year income statement for the company using variable costing.

2. Prepare the current-year income statement for the company using absorption costing.

3. Explain any difference between the two income numbers under the two costing methods in parts 1 and 2.

Net income of the companyunder variable costing is $8,443,000.

Net income of the company under absorption costing is$8,443,000.

See the step by step solution

Step by Step Solution

Step 1: Meaning of Income Statement

An income statement is a report that contains the description of revenues and expenses generated and incurred by a business entity during one accounting period. It is prepared annually to ascertain the profit or loss earned or incurred.

Step 2: Preparation of income statement under variable costing  

Oak Mart
Variable Costing Income Statement

Particulars

Details

Amounts ($)

Sales

(118000*320)

$37,760,000

Less: Variable costs

Beginning inventory

(3000*135)

405,000

Direct materials

(118000*40)

4,720,000

Direct labor

(118000*62)

7,316,000

Variable overhead

3,220,000

Variable selling and administrative expenses

1,416,000

Contribution

$20,683,000

Less: Fixed costs

Beginning inventory

(3000*80)

240,000

Fixed overhead

7,400,000

Fixed selling and administrative expenses

4,600,000

Net income

$8,443,000

Step 3: Preparation of income statement under absorption costing

Oak Mart
Absorption Costing Income Statement

Particulars

Details

Amounts ($)

Sales

(118000*320)

$37,760,000

Less: Cost of goods sold (Working note)

23,301,000

Gross profit

$14,459,000

Less: Operating expenses

Variable selling and administrative expenses

1,416,000

Fixed selling and administrative expenses

4,600,000

Net income

$8,443,000

Working Note:

Computation of cost of goods sold:

Particulars

Amounts ($)

Beginning inventory

Variable cost

$405,000

Fixed cost

240,000

Manufacturing costs:

Direct materials (118000*40)

4,720,000

Direct labor (118000*62)

7,316,000

Variable overhead

3,220,000

Fixed overhead

7,400,000

Cost of goods sold

$23,301,000

Step 4: Explanation of difference

As per the data provided above, there is no difference between the net incomes under variable and absorption costing because the number of units sold and produced is identical, including the opening inventory.

The net income varies when there is a discrepancy between the units sold and the units produced

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