Question

Dion company reports the absorption costing income statement below for May. The company began the month with no finished goods inventory. Dion produced 22,400 units, and 3,200 units remain in ending finished goods inventory for May. Fixed overhead was $56,000. Variable selling and administration expenses were $42,000 and fixed selling and administrative expenses were $22,000. Sales (19,200 units) $480,000, cost of goods sold $388,000, gross profit $92,000, selling and administrative expenses $64,000. Prepare an income statement using variable costing.

Answer 1

To prepare an income statement using variable costing, deduct the variable manufacturing costs from sales revenue, deduct the variable selling and administrative expenses, and subtract the fixed selling and administrative expenses to calculate the net profit.

Step-by-step explanation:

To prepare an income statement using variable costing, we need to deduct the variable manufacturing costs (direct materials, direct labor, and variable overhead) incurred during the production of the units sold.

The fixed manufacturing costs are not included in the cost of goods sold, but are expensed in the period they are incurred. The variable selling and administrative expenses are deducted from the sales revenue, and the fixed selling and administrative expenses are expensed in the period they are incurred.

Here is the income statement using variable costing:

Income Statement (Variable Costing)

Sales: $480,000

Variable manufacturing costs:

• Variable selling and administrative expenses: $42,000
• Total variable costs: $XXX
• Contribution margin: Sales - Total variable costs
• Fixed manufacturing costs: $0
• Fixed selling and administrative expenses: $22,000
• Total fixed costs: $XXX
• Gross profit: Contribution margin - Total fixed costs
• Net profit: Gross profit - Selling and administrative expenses