Question

Andrea Cookie Company produced 5,000 cases of cookies this year. It sold 4,000 cases for $18 each. There were no beginning inventories. Variable manufacturing costs were $30,000, and fixed manufacturing expenses were $20,000. Selling and administrative expenses were $5,000, all fixed. a. Prepare income statements using the variable costing and absorption costing. b. Explain why net income under variable costing is different than net income under absorption costing when the same number of units was sold.

Answer 1

a. Variable costing :

Manufacturing cost per unit = $30000 / 5000 = $6

The income statement using variable costing is as below:

Particulars	Amount ($)	Amount ($)
Sales ($18*4000)		72000
Less: Cost of goods sold
Cost of goods manufactured ($6*5000)	30000
Less: Closing Inventory ($6*1000)	6000	24000
Contribution margin		48000
Less: Period expenses
Manufacturing expenses	20000
Selling and administrative expenses	5000	25000
Net operating income		23000

b. Absorption costing:

Manufacturing cost per unit = ($30000 + $20000) / 5000 = $10

The income statement using absorption costing is as below:

Particulars	Amount ($)	Amount ($)
Sales ($18*4000)		72000
Less: Cost of goods sold
Cost of goods manufactured ($10*5000)	50000
Less: Closing Inventory ($10*1000)	10000	40000
Gross profit		32000
Less: Selling and administrative expenses		5000
Net operating income		27000

b. The difference between net income using absorption costing and variable costing is due to the fixed manufacturing expenses. Fixed manufacturing expenses are considered product cost in absorption costing. The difference in income is due to the fixed manufacturing cost on the closing inventory units.