Prepare an income statement according to the absorption costing concept and the

Question

Prepare an income statement according to the absorption costing concept and the variable costing concept.

Question Details

Digital Edge Inc. assembles and sells MP3 players. The company began operations on May 1, 2010, and operated at 100% of capacity during the first month. The following data summarize the results for May:

a) What is the cost of goods sold using the absorption cost system?
b) What is the variable cost of goods sold using the variable costing concept?


Sales (14,000 units) $1,820,000
Production costs (18,000 units)
Direct Materials $865,800
Direct Labor 421,200
Variable Factory Overhead 210,600
Fixed Factory Overhead 140,400 1,638,000
Selling and administrative expenses
Variable selling and administrative expenses $254,800
Foxed selling and administrative expenses 100,000 354,800

Explanation / Answer

Cost of goods sold using absorption costing: Cost of goods sold can be determined as follows using absorption costing. Direct material                              = $865,800 Direct labor                                  = 421,200 Variable factory overhead             = 210,600 Fixed factory overfead                  = 140,400 So cost of goods sold                   = $1,638,000 Cost of goods sold using variable costing: Under variable costing we will not consider the fixed factory oberhead while calculating the cost of goods sold. Direct material                              = $865,800 Direct labor                                  = 421,200 Variable factory overhead             = 210,600 So cost of goods sold                   = $1,497,600 Direct material                              = $865,800 Direct labor                                  = 421,200 Variable factory overhead             = 210,600 So cost of goods sold                   = $1,497,600

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