Heather Inc has the following information for its first year of operations: Units produced 1,800Units sold 1,800Unit sales price$130.00Direct material per unit$25.00Direct labor per unit$10.00Variable manufacturing overhead per unit$20.00Fixed manufacturing overhead$57,600Variable selling expenses$10.00Fixed selling and administrative expenses$33,000 a. Prepare Heather's full absorption costing income statement.b. Prepare Heather's variable costing income statement.
What will be an ideal response?
a.
| Sales (1,800 × $130) | $234,000 |
| Less: Cost of Goods Sold (1,800 × $87) | 156,600 |
| Gross Margin ($234,000 - $156,600) | $77,400 |
| Less: Nonmanufacturing Expenses [($10 × 1,800) + $33,000] | 51,000 |
| Profit ($77,400 - $51,000) | $26,400 |
(Cost of goods sold per unit = $25 + $10 + $20 + ($57,600/1,800) = $87)
b.
| Sales (1,800 × $130) | $234,000 |
| Less: Variable Costs (1,800 × $65) | 117,000 |
| Contribution Margin ($234,000 - $117,000) | $117,000 |
| Less: Fixed Costs ($57,600 + $33,000) | 90,600 |
| Profit ($117,000 - $90,600) | $26,400 |
(variable cost per unit = $25 + $10 + $20 + $10 = $65)
Full absorption costing uses the income statement format Sales - Cost of goods sold = Gross margin - Nonmanufacturing expenses = Profit. Variable costing uses the format Sales - Variable costs = Contribution margin - Fixed costs = Profit. Note that the net incomes are equal under both methods. This only happens when the units sold equals the number of units manufactured.
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