Question

Estimated Income Statements, using Absorption and Variable Costing

Prior to the first month of operations ending October 31 Marshall Inc. estimated the following operating results:

Sales (16,000 x $55)	$880,000
Manufacturing costs (16,000 units):
Direct materials	534,400
Direct labor	126,400
Variable factory overhead	59,200
Fixed factory overhead	70,400
Fixed selling and administrative expenses	19,100
Variable selling and administrative expenses	23,200

The company is evaluating a proposal to manufacture 17,600 units instead of 16,000 units, thus creating an Inventory, October 31 of 1,600 units. Manufacturing the additional units will not change sales, unit variable factory overhead costs, total fixed factory overhead cost, or total selling and administrative expenses.

a. 1. Prepare an estimated income statement, comparing operating results if 16,000 and 17,600 units are manufactured in the absorption costing format. If an amount box does not require an entry leave it blank or enter “0”.

Marshall Inc.
Absorption Costing Income Statement
For the Month Ending October 31
	16,000 Units Manufactured	17,600 Units Manufactured
	$	$
Cost of goods sold:
	$	$
	$	$
	$	$
Income from operations	$	$

a. 2. Prepare an estimated income statement, comparing operating results if 16,000 and 17,600 units are manufactured in the variable costing format. If an amount box does not require an entry leave it blank or enter “0”.

Marshall Inc.
Variable Costing Income Statement
For the Month Ending October 31
	16,000 Units Manufactured	17,600 Units Manufactured
	$	$
Variable cost of goods sold:
	$	$
	$	$
	$	$
	$	$
Fixed costs:
	$	$
Total fixed costs	$	$
	$	$

Answer 1

Income statement under absorption costing
Particulars				16000 unit	17600 unit
Sale revenue				880000	880000
Cost of goods sold (16000*49.4),(17600*49)				790400	862400
Less : Inventory at the end (1600*49.4)					79040
Cost of goods sold				790400	783360
Gross Profit				89600	96640
Selling & adm expenses				42300	42300
Income from operation				47300	54340
Variable costin Income statement				16000 unit	17600 unit
sale				880000	880000
Variable cost of goods sold (16000*45),(17600*45)				720000	792000
less: inventory at the end (1600*45)					72000
Variable cost of goods sold				720000	720000
Manufacturing margin				160000	160000
Variable selling & adm exp				23200	23200
Contribution margin				136800	136800
Fixed factory overhead				70400	70400
Fixed selling & adm expenses				19100	19100
Total fixed expenses				89500	89500
Income from operation				47300	47300
Calculation of variable cost p.u				16000		17600
				Absortion	variable	Absortion	variable
Direct material				33.4	33.4	33.4	33.4
Direct labor				7.9	7.9	7.9	7.9
Variable factory OH				3.7	3.7	3.7	3.7
fixed factory overhead				4.4		4
Total manufacturing cost				49.4	45	49	45