On January 1, of the current year, Townsend company commenced operations. It ope
ID: 2447894 • Letter: O
Question
On January 1, of the current year, Townsend company commenced operations. It operated its plant at 100% capacity during January. The following data summarized the results for January.:
Units
Production 50,000
Sales ($18 per unit) 42,000
Inventory, January 31 8,000
Manufacturing Costs:
Variable $575,000
Fixed $80,000
Total $655,000
Selling and administrative expenses
Variable $35,000
Fixed 10,000
Total $45,500
A. Prepare an income statement using the absorption costing
B. Prepare an income statement using variable costing
C. Explain the difference in absorption costing and variable costing income from operations.
Units
Production 50,000
Sales ($18 per unit) 42,000
Inventory, January 31 8,000
Manufacturing Costs:
Variable $575,000
Fixed $80,000
Total $655,000
Selling and administrative expenses
Variable $35,000
Fixed 10,000
Total $45,500
Explanation / Answer
Townsend Company Variable Costing Income statement Prouduction units 50,000 Sales units 42,000 Closing Balance Units 8,000 Details Amt /Unit Total Amount $ Sales Revenue 18 756,000 Less Variable cost of production Opening Cost 0 Variable Production cost 11.50 575,000 Less : Closing Stock 11.50 92,000 Variable cost of Production 483,000 Less : Variable selling & admin expense 0.833 35,000 Total variable cost of sales 448,000 Contribution Margin 238,000 Less Fixed costs Fixed Manufacturing costs 80,000 Fixed selling & Admin cost 10,000 Net Opearting Income 148,000 Townsend Company Absorption Costing Income statement Prouduction units 50,000 Sales units 42,000 Closing Balance Units 8,000 Details Amt /Unit Total Amount $ Sales Revenue 18 756,000 Less : cost of production Opening Cost 0 Variable Production cost 11.50 575,000 Fixed productuion cost 1.600 80,000 Less : Closing Stock 13.10 104,800 Cost Of Production 550,200 Gross Profit 205,800 Selling And Adminstrative cost 45,000 Net Opearting Income 160,800 Profit reconciliation Difference of profit between two methods (12,800) Closing Stock Value in variable costing 92,000 Closing Stock Value in absorption costing 104,800 Extra COGS in variable costing due to lower (12,800) value of closing stock Net difference zero The diiference is caused because in absorption costing the fixed manufacturing are proportionately carried forward with closing stock but in variable cost fixed manufacturing cost is charged off as period cost.