Question

Bionic Cotton Inc. manufactures and sells high-quality sporting goods equipment under its highly recognizable Cool Cat logo. The company began operations on January 1, 2016, and operated at 100% of capacity (92,000 units) during the first month, creating an ending inventory of 9,000 units. During February, the company produced 83,800 garments during the month but sold 92,800 units at $90 per unit. The February manufacturing costs and selling and administrative expenses were as follows:

			Number of Units	Unit Cost	Total Cost
Manufacturing costs in February beginning inventory:
Variable			9,000	$56	$ 504,000
Fixed			9,000	12	108,000
Total				$68	$612,000
February manufacturing costs:
Variable			83,800	$56	$ 4,692,800
Fixed			83,800	14	1,173,200
Total				$70	$5,866,000
Selling and administrative expenses:
Variable					$ 1,360,000
Fixed					334,000
Total					$1,694,000

	Required:
A.	Prepare an income statement according to the absorption costing concept for February.*
B.	Prepare an income statement according to the variable costing concept for February.*
C.	What is the reason for the difference in the amount of income from operations reported in (A) and (B)? * Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries. Be sure to complete the statement heading. A colon (:) will automatically appear if it is required. If a net loss is incurred, enter that amount as a negative number using a minus sign.

Answer 1

The Absorption Costing Unit Product Cost
	Jan	Feb
Variable Manufacturing Cost	$56.00	$56.00
Fixed Manufacturing Cost	$12.00	$14.00
Unit Product cost	$68.00	$70.00

1. The Absorption Costing Income Statement
	Feb
No. of Unit Sold	92800
Sales @$90	$83,52,000
Less: Cost of Goods sold ((83800*70)+(9000*68))	$64,78,000
Gross Margin	$18,74,000
Less: Selling and distribution expense
Variable Expense	$13,60,000
Fixed Expense	$3,34,000
Net operating income	$1,80,000

2. The Variable Costing Income Statement
	Feb
No. of Unit Sold	92800
Sales	$83,52,000
Less: Variable cost
variable cost of goods sold $56	$51,96,800
Variable selling expense	$13,60,000
Contribution margin	$17,95,200
Fixed expense:
Fixed Manufacturing overheads	$11,73,200
Fixed selling expense	$3,34,000
Net operating Income	$2,88,000

3. Reconciliation Statement of Income
	Feb
Income under variable c osting	$2,88,000.00
Less: Fixed OH in Inventory (9000units @12)),	$1,08,000.00
Income under Absorption Costing	$1,80,000.00

As shown in Reconciliation statement , difference in come as per different method is due to last year fixed overhead cost absorbed in ending inventory.

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