Question

# Income Statements under Absorption and Variable Costing Patagucci Inc. manufactures and sells athletic equipment. The company...

Income Statements under Absorption and Variable Costing

Patagucci Inc. manufactures and sells athletic equipment. The company began operations on August 1, 2016, and operated at 100% of capacity (38,500 units) during the first month, creating an ending inventory of 3,500 units. During September, the company produced 35,000 garments but sold 38,500 units at \$80 per unit. The September manufacturing costs and selling and administrative expenses were as follows:

 Number of Units Unit Cost Total Cost Manufacturing costs in September beginning inventory: Variable 3,500 \$32.00 \$112,000 Fixed 3,500 12.00 42,000 Total \$44.00 \$154,000 September manufacturing costs: Variable 35,000 \$32.00 \$1,120,000 Fixed 35,000 13.20 462,000 Total \$45.20 \$1,582,000 Selling and administrative expenses: Variable \$600,600 Fixed 304,200 Total \$904,800

a. Prepare an income statement according to the absorption costing concept for September.

 Patagucci Inc. Absorption Costing Income Statement For the Month Ended September 30, 2016 Sales \$ Cost of goods sold: Beginning inventory \$ Cost of goods manufactured Cost of goods sold Gross profit \$ Selling and administrative expenses Income from operations \$

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a. Under absorption costing, the cost of goods manufactured includes direct materials, direct labor, and factory overhead costs. Both fixed and variable factory costs are included as part of factory overhead.

Learning Objective 1.

b. Prepare an income statement according to the variable costing concept for September.

 Patagucci Inc. Variable Costing Income Statement For the Month Ended September 30, 2016 Sales \$ Variable cost of goods sold Manufacturing margin \$ Variable selling and administrative expenses Contribution margin \$ Fixed costs: Fixed manufacturing costs \$ Fixed selling and administrative expenses Income from operations \$

Solution:

(a)

 Patagucci Inc. Absorption Costing Income Statement For the Month Ended September 30, 2016 Sales (38,500 X \$80) \$3,080,000 Cost of goods sold: Beginning inventory (3,500 X \$ 44) \$154,000 Cost of goods manufactured (35,000 X\$45.20) \$ 1,582,000 Cost of goods sold \$ 1,736,000 Gross profit \$1,344,000 Selling and administrative expenses \$904,800 Income from operations \$439,200

Note: Under absorption costing fixed and variable cost is a part of product cost.

(b)

 Patagucci Inc. Variable Costing Income Statement For the Month Ended September 30, 2016 Sales(38,500 X \$80) \$3,080,000 Variable cost of goods sold Beginning inventory (3,500 X \$ 32) : \$112,000 Variable cost of goods manufactured : (35,000 X \$ 32) :                                 \$1,120,000 \$ 1,232,000 Manufacturing margin \$1,848,000 Variable selling and administrative expenses \$600,600 Contribution margin \$1,247,400 Fixed costs: Fixed manufacturing costs (35,000 X \$ 13.20) \$462,000 Fixed selling and administrative expenses 304,200 766,200 Income from operations \$481,200

Note: Under variable costing only variable cost is a part of product cost.

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