Question

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

Sales price per unit	$	310	per unit
Units produced this year		105,000	units
Units sold this year		108,250	units
Units in beginning-year inventory		3,250	units
Beginning inventory costs
Variable (3,250 units × $135)	$	438,750
Fixed (3,250 units × $75)		243,750
Total	$	682,500
Manufacturing costs this year
Direct materials	$	44	per unit
Direct labor	$	70	per unit
Overhead costs this year
Variable overhead	$	3,200,000
Fixed overhead	$	7,200,000
Selling and administrative costs this year
Variable	$	1,500,000
Fixed		4,400,000

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

Answer 1

Under variable costing, varible manufacturing costs only shall be considered as product costs. As a result, all fixed manufacturing costs shall be recognized as expense for the year in which such fixed manufacturing overhead costs were incurred. As a result, there will be no deferred fixed manufacturing overhead costs from the previous period under variable costing. In other words, cost of goods sold for the year will be equal to number of units sold multiplied by the variable manufacturing costs such as direct materials, direct labor and variable manufacturing overhead costs. It implies that fixed overhead costs deferred from previous period through the beginning inventory of current period shall be ignored while preparing income statement under variable costing as those fixed overhead costs would have been claimed as expenditure for the previous period itself fully under variable costing.

$33,557,500 (108,250 units x $310] Oak Mart Income statement (Variable costing) For the second year of the business Sale revenue Variable manufacturing costs: Beginning inventory - variable costs $438,750 Current cost - Direct materials $4,620,000 Current cost - Direct labor $7,350,000 Current cost - Variable mfg. overhead $3,200,000 Total variable manufacturing costs Manufacturing margin Variable selling and administrative expenses Contribution margin Fixed costs and expenses: Fixed manufacturing overhead $7,200,000 Fixed selling and administrative expenses $4,400,000 Total fixed costs and expenses Net income (loss) (3,250 units $135] [105,000 units x $44] [105,000 units x $70] [Given] $15,608,750 $17,948,750 $1,500,000 [Given] $16,448,750 $11,600,000 $4,848,750

Alternate possible presentation: Oak Mart Income statement (Variable costing) For the second year of the business Sale revenue $33,557,500 [108,250 units x $310] Variable costs & expenses: Beginning inventory - variable costs $438,750 [3,250 units x $135] Current cost - Direct materials $4,620,000 [105,000 units x $44] Current cost - Direct labor $7,350,000 [105,000 units x $70] Current cost - Variable mfg. overhead $3,200,000 [Given] Variable selling and admin. expenses $1,500,000 [Given] Total variable costs & expenses $17,108,750 Contribution margin $16,448,750 Fixed costs and expenses: Fixed manufacturing overhead $7,200,000 Fixed selling and administrative expenses $4,400,000 Total fixed costs and expenses $11,600,000 Net income (loss) $4,848,750