Question

Yale Company manufactures hair brushes that sell at wholesale for $3 per unit. The company had no beginning inventory in the prior year. These data summarize the current and prior year operations:

	Prior Year			Current Year
Sales		3,400	units		7,000	units
Production		5,200	units		5,200	units
Production cost
Factory—variable (per unit)	$	0.60		$	0.60
—fixed	$	2,600		$	2,600
Marketing—variable	$	0.40		$	0.40
Administrative—fixed	$	500		$	500

Required:

1. Prepare an income statement for each year based on full costing.

2. Prepare an income statement for each year based on variable costing.

3. Prepare a reconciliation of the difference each year in the operating income resulting from using the full costing method and variable costing method.

Answer 1

Ans. 1	In absorption costing method, the unit product cost is the sum of all manufacturing costs per unit
	whether it is fixed or variable.
	Unit product cost under Full Costing:
	Variable Overhead per unit	$0.60
	Fixed overhead per unit   ($2,600 / 5200)	$0.50
	Product Cost per unit	$1.10
	*Fixed overhead per unit = Fixed overhead / Units produced
Ans.	YALE COMPANY
	Full costing
	Income Statement
	PARTICULARS	Prior Year		Current Year
	Sales		$10,200		$21,000
	Less: Cost of goods sold
	Opening inventory	$0		$1,980
	Add: Cost of goods produced	$5,720		$5,720
	Cost of goods available for sale	$5,720		$7,700
	Less: Ending inventory	($1,980)		$0
	Cost of goods sold (total)		$3,740		$7,700
	Gross margin		$6,460		$13,300
	Selling & Administrative expenses:
	Fixed	$500		$500
	Variable	$1,360		$2,800
	Total Selling and administrative expenses		$1,860		$3,300
	Net Income		$4,600		$10,000
	*Calculations :
	Beginning inventory for Prior year = 0
	Ending inventory units for prior year = Production - Sales
	5,200 - 3,400 = 1,800 units
	Cost of ending inventory = Ending inventory units * Unit product cost = (1,800 * $1.1) = $1,980.
	Beginning inventory for Current year = Ending inventory for prior year = 1,800 units   ($1,980)
	Ending inventory units for current year = Beginning inventory units + Units produced - Units sold
	1,800 + 5,200 - 7,000 = 0 units
	*Sales = Units sold * Unit selling price
	Prior Year   (3,400 * $3) = $10,200
	Current Year   (7,000 * $3) = $21,000
	*Cost of goods produced = Units produced * Unit product cost
	Prior Year   (5,200 * $1.1) = $5,720
	Current Year   (5,200 * $1.1) = $5,720
	*Variable selling and administrative cost = Variable marketing cost per unit * Units sold
	Prior Year   (3,400 * $0.40)	$1,360
	Current Year   (7,000 * $0.40)	$2,800
Ans. 2	In variable costing method, the unit product cost is the sum of only variable
	manufacturing costs per unit
	Unit product cost under Variable Costing:
	Variable Overhead per unit	$0.60
	Total production cost per unit	$0.60
	YALE COMPANY
	Variable Costing
	Income Statement
	PARTICULARS	Prior Year		Current Year
	Sales		$10,200		$21,000
	Less: Variable cost of goods sold:
	Opening inventory	$0		$1,080
	Add: Cost of goods produced	$3,120		$3,120
	Variable cost of goods available for sale	$3,120		$4,200
	Less: Ending inventory	-$1,080		$0
	Variable cost of goods sold		$2,040		$4,200
	Gross Contribution Margin		$8,160		$16,800
	Less: Variable Selling and Adm. Exp.		$1,360		$2,800
	Contribution Margin		$6,800		$14,000
	Less: Fixed expenses:
	Fixed manufacturing overhead	$2,600		$2,600
	Fixed selling and adm. expenses	$500	$3,100	$500	$3,100
	Net operating income		$3,700		$10,900
	*Cost of goods produced = Units produced * Unit product cost
	Prior Year   (5,200 * $0.60)	$3,120
	Current Year   (5,200 * $0.60)	$3,120
	Cost of ending inventory = Ending inventory units * Unit product cost
	Prior year    (1,800 * $0.60) = $1,080
	Current   year    ( 0 * $0.60) = $0.
	*Variable selling and administrative cost = Variable marketing cost per unit * Units sold
	Prior Year   (3,400 * $0.40)	$1,360
	Current Year   (7,000 * $0.40)	$2,800
Ans. 3	Prior Year:
	Variable costing net income		$3,700
	Add: Ending inventory at fixed overhead per unit (1,800 * $0.50)		$900
	Absorption costing net income		$4,600
	Current Year :
	Variable costing net income		$10,900
	Less: Beginning inventory		($900)
	Absorption costing net income		$10,000