Question

Yale Company manufactures hair brushes that sell at wholesale for $3 per unit. The company had no beginning inventory in the prior year. These data summarize the current and prior year operations:

	Prior Year			Current Year
Sales		3,400	units		7,000	units
Production		5,200	units		5,200	units
Production cost
Factory—variable (per unit)	$	0.60		$	0.60
—fixed	$	2,600		$	2,600
Marketing—variable	$	0.40		$	0.40
Administrative—fixed	$	500		$	500

Required:

1. Prepare an income statement for each year based on full costing.

2. Prepare an income statement for each year based on variable costing.

3. Prepare a reconciliation of the difference each year in the operating income resulting from using the full costing method and variable costing method.

Prepare an income statement for each year based on full costing.

YALE COMPANY
Full Costing
Income Statement
	Prior Year		Current Year
Less: Cost of goods sold
Available for sale
Cost of goods sold
Gross margin
Less: Selling and administrative costs
Operating income

Answer 1

Ans. 1	YALE COMPANY
	Full Costing Income Statement
	PARTICULARS	Prior Year		Current Year
	Sales		$10,200		$21,000
	Less: Cost of goods sold
	Opening inventory	$0		1980
	Add: Cost of goods manufactured	$5,720		$5,720
	Cost of goods available for sale	$5,720		$7,700
	Less: Ending inventory	-$1,980		$0
	Cost of goods sold (total)		$3,740		$7,700
	Gross margin		$6,460		$13,300
	Marketing & Administrative expenses:
	Fixed	$500		$500
	Variable	$1,360		$2,800
	Total Marketing and administrative expenses		$1,860		$3,300
	Net Income		$4,600		$10,000
	*Variable selling & administrative expenses   =   Units sold * Variable selling and administrative expenses per unit
	*Ending inventory   = (Units produced - Units sold) * Production cost per unit
	*Calculations for Full costing Income statement:
	Unit product cost under Full Costing:
	Variable Production cost per unit	$0.60
	Fixed Production cost per unit   ($2,600 / 5,200)	$0.50
	Product Cost per unit	$1.10
	*Fixed cost per unit = Fixed production cost / Units produced
	*Calculations:	Prior Year	Current Year
	Sales	3,400 * $3	7,000 * $3
	Less: Cost of goods sold
	Opening inventory	$0	1,800 * $1.10
	Add: Cost of goods manufactured	5,200 * $1.10	5,200 * $1.10
	Cost of goods available for sale
	Ending inventory	(5,200 - 3,400) * $1.10	(5,200+1,800-7,000) * $1.10
	Marketing & Administrative expenses:
	Fixed	$500	$500
	Variable	$0.40 * 3,400	$0.40 * 7,000
Ans. 2	YALE COMPANY
	Full Costing Income Statement
	PARTICULARS	Prior Year		Current Year
	Sales		$10,200		$21,000
	Less: Variable cost of goods sold:
	Opening inventory	$0		1080
	Add: Variable cost of goods manufactured	$3,120		$3,120
	Variable cost of goods available for sale	$3,120		$4,200
	Less: Ending inventory	-$1,080		$0
	Variable cost of goods sold		$2,040		$4,200
	Gross Contribution Margin		$8,160		$16,800
	Less: Variable Marketing expenses		$1,360		$2,800
	Contribution Margin		$6,800		$14,000
	Less: Fixed expenses:
	Fixed factory production cost	$2,600		$2,600
	Fixed administrative expenses	$500	$3,100	$500	$3,100
	Net operating income		$3,700		$10,900
	*Variable cost of goods manufactured = Units produced * Variable unit product cost
	*Variable selling and administrative expenses = Units sold * Variable selling and administrative expenses per unit sold
	In variable costing method, the unit product cost is the sum of only variable
	manufacturing costs per unit
	Unit product cost under Variable Costing = $0.60 per unit in each year
	*Calculations:
		Prior Year	Current Year
	Sales	3,400 * $3	7,000 * $3
	Less: Variable cost of goods sold:
	Opening inventory	$0	1,800 * $0.60
	Variable Cost of goods manufactured	5,200 * $0.60	5,200 * $0.60
	Ending inventory	(5,200 - 3,400) * $0.60	(5,200+1,800-7,000) * $0.60
	Variable Marketing expenses	$0.40 * 3,400	$0.40 * 7,000
	Fixed factory production cost	$2,600	$2,600
	Fixed administrative expenses	$500	$500
Ans. 3	Reconciliation of the difference between Full costing and Variable costing net income:
		Prior Year
	Variable costing net income	$10,900
	Less: Fixed part of beginning inventory ($0.50*1,800)	-$900
	Full costing net income	$10,000
		Current Year
	Variable costing net income	$3,700
	Add: Fixed part of ending inventory ($0.50*1,800)	$900
	Full costing net income	$4,600
	The underlying reason for the difference between two methods is the fixed part
	of beginning and ending inventory.