Question

a manufacturer produces one product. at january 1, all inventories were zero. during the year, the company produced 1,000 units. the company sold 700 units and the sales price was $10 per unit. variable manufacturing costs were $2 per unit while variable selling costs were $1 per unit. fixed manufacturing costs were $1,800 while fixed selling costs were $2,800. required (1) prepare the income statements for the year using: (a) absorption costing (b) variable costing.

Answer 1

To prepare the income statements using absorption costing, the sales revenue, cost of goods sold, gross profit, selling expenses, fixed selling expenses, and operating income need to be calculated. For variable costing, the sales revenue, variable cost of goods sold, variable selling expenses, contribution margin, fixed manufacturing costs, fixed selling expenses, and operating income need to be calculated.

Step-by-step explanation:

To prepare the income statements using absorption costing, we need to include both variable and fixed manufacturing costs in the cost of goods sold. The income statement would show:

(a) Absorption Costing

Sales revenue: $7,000 (700 units x $10)Cost of goods sold: $5,500 (700 units x $2 variable manufacturing cost + $1,800 fixed manufacturing cost)Gross profit: $1,500 (Sales revenue - Cost of goods sold)Selling expenses: $700 (700 units x $1 variable selling cost)Fixed selling expenses: $2,800Operating income (profit): -$2,000 (Gross profit - Selling expenses - Fixed selling expenses)

(b) Variable Costing

Sales revenue: $7,000Variable cost of goods sold: $2,000 (700 units x $2 variable manufacturing cost)Variable selling expenses: $700Contribution margin: $4,300 (Sales revenue - Variable cost of goods sold - Variable selling expenses)Fixed manufacturing costs: $1,800Fixed selling expenses: $2,800Operating income (profit): -$2,300 (Contribution margin - Fixed manufacturing costs - Fixed selling expenses)