Question

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		$

Feedback

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		$

Answer 1

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.