Question 20.IP.1: During the current period, McLaughlin Company sold 60,000 un...
During the current period, McLaughlin Company sold 60,000 units of product at $30 per unit. At the beginning of the period, there were 10,000 units in inventory and McLaughlin Company manufactured 50,000 units during the period. The manufacturing costs and selling and administrative expenses were as follows:
| Total Cost | Number of Units |
Unit Cost | |
| Beginning inventory: | |||
| Direct materials . . . . . . . . . . . . . . . . . . . . . | $ 67,000 | 10,000 | $ 6.70 |
| Direct labor . . . . . . . . . . . . . . . . . . . . . . . | 155,000 | 10,000 | 15.50 |
| Variable factory overhead . . . . . . . . . . . . . | 18,000 | 10,000 | 1.80 |
| Fixed factory overhead . . . . . . . . . . . . . . . | 20,000 | 10,000 | 2.00 |
| Total . . . . . . . . . . . . . . . . . . . . . . . . . . . | \underline{\underline{\$ \ 260,000}} | \underline{\underline{\$ \ 26.00}} | |
| Current period costs: | |||
| Direct materials . . . . . . . . . . . . . . . . . . . . . | $ 350,000 | 50,000 | $ 7.00 |
| Direct labor . . . . . . . . . . . . . . . . . . . . . . . | 810,000 | 50,000 | 16.20 |
| Variable factory overhead . . . . . . . . . . . . . | 90,000 | 50,000 | 1.80 |
| Fixed factory overhead . . . . . . . . . . . . . . . | 100,000 | 50,000 | 2.00 |
| Total . . . . . . . . . . . . . . . . . . . . . . . . . . . | \underline{\underline{\$ \ 1,350,000}} | \underline{\underline{\$ \ 27.00}} | |
| Selling and administrative expenses: | |||
| Variable . . . . . . . . . . . . . . . . . . . . . . . . . . | $ 65,000 | ||
| Fixed . . . . . . . . . . . . . . . . . . . . . . . . . . . . | 45,000 | ||
| Total . . . . . . . . . . . . . . . . . . . . . . . . . . . | \underline{\underline{\$ \ 110,000}} |
Instructions
1. Prepare an income statement based on the absorption costing concept.
2. Prepare an income statement based on the variable costing concept.
3. Give the reason for the difference in the amount of income from operations in parts (1) and (2).
1.
| Absorption Costing Income Statement |
||
| Sales (60,000 × $30) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | $1,800,000 | |
| Cost of goods sold: | ||
| Beginning inventory (10,000 × $26) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | $260,000 | |
| Cost of goods manufactured (50,000 × $27) . . . . . . . . . . . . . . . . . . . . . . . . . | 1,350,000 | |
| Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | 1,610,000 | |
| Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | $ 190,000 | |
| Selling and administrative expenses ($65,000 + $45,000) . . . . . . . . . . . . . . . | 110,000 | |
| Income from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | \underline{\underline{\$ \ 80,000}} | |
2.
| Variable Costing Income Statement |
||
| Sales (60,000 × $30) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | $1,800,000 | |
| Variable cost of goods sold: | ||
| Beginning inventory (10,000 × $24) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | $240,000 | |
| Variable Cost of goods manufactured (50,000 × $25) . . . . . . . . . . . . . . . . . . . . . . . . . | 1,250,000 | |
| Variable Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | 1,490,000 | |
| Manufacturing margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | $ 310,000 | |
| Variable selling and administrative expenses . . . . . . . . . . . . . . . . . . . . . | 65,000 | |
| Contribution margin. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | $ 245,000 | |
| Fixed costs: | ||
| Fixed manufacturing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | $100,000 | |
| Fixed selling and administrative expenses . . . . . . . . . . . . . . . . . . . . . | 45,000 | 145,000 |
| Income from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | \underline{\underline{\$ \ 100,000}} | |
3. The difference of $20,000 ($100,000 – $80,000) in the amount of income from operations is attributable to the different treatment of the fixed manufacturing costs. The beginning inventory in the absorption costing income statement includes $20,000 (10,000 units × $2) of fixed manufacturing costs incurred in the preceding period. This $20,000 was included as an expense in a variable costing income statement of a prior period. Therefore, none of it is included as an expense in the current period variable costing income statement.