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

Question

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 . . . . . . . . . . . . . . . . . . . . . . . . . . .	[latex]\underline{\underline{\$ \ 260,000}}[/latex]		[latex]\underline{\underline{\$ \ 26.00}}[/latex]
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 . . . . . . . . . . . . . . . . . . . . . . . . . . .	[latex]\underline{\underline{\$ \ 1,350,000}}[/latex]		[latex]\underline{\underline{\$ \ 27.00}}[/latex]
Selling and administrative expenses:
Variable . . . . . . . . . . . . . . . . . . . . . . . . . .	$ 65,000
Fixed . . . . . . . . . . . . . . . . . . . . . . . . . . . .	45,000
Total . . . . . . . . . . . . . . . . . . . . . . . . . . .	[latex]\underline{\underline{\$ \ 110,000}}[/latex]

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).

Accepted Answer

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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		[latex]\underline{\underline{\$ \ 80,000}}[/latex]

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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		[latex]\underline{\underline{\$ \ 100,000}}[/latex]

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.

Question 20.IP.1: During the current period, McLaughlin Company sold 60,000 un...

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