Question

Exercise 6-3 Income reporting under absorption costing and variable costing LO P2

Sims Company, a manufacturer of tablet computers, began operations on January 1, 2017. Its cost and sales information for this year follows.

Manufacturing costs
Direct materials	$	40	per unit
Direct labor	$	60	per unit
Overhead costs for the year
Variable overhead	$	3,000,000
Fixed overhead	$	7,000,000
Selling and administrative costs for the year
Variable	$	750,000
Fixed	$	4,750,000
Production and sales for the year
Units produced		100,000	units
Units sold		70,000	units
Sales price per unit	$	360	per unit

1. Prepare an income statement for the year using variable costing.
2. Prepare an income statement for the year using absorption costing.
3. Under what circumstance(s) is reported income identical under both absorption costing and variable costing?

Exercise 6-5 Absorption costing and variable costing income statements LO P2

Rey Company’s single product sells at a price of $222 per unit. Data for its single product for its first year of operations follow.

Direct materials	$	26	per unit
Direct labor	$	34	per unit
Overhead costs
Variable overhead	$	12	per unit
Fixed overhead per year	$	364,000	per year
Selling and administrative expenses
Variable	$	24	per unit
Fixed	$	212,000	per year
Units produced and sold		26,000	units

1. Prepare an income statement for the year using absorption costing
2. Prepare an income statement for the year using variable costing.

Answer 1

Exercise 6-3

Answer 1.

Answer 2.

Answer 3.

Net Operating Income using Variable Costing and Absorption Costing will be same when units produced and units sold are equal.