Patagucci Inc. manufactures and sells athletic equipment. The company began oper
ID: 2460225 • Letter: P
Question
Patagucci Inc. manufactures and sells athletic equipment. The company began operations on August 1, 2014, and operated at 100% of capacity (38,500 units) during the first month, creating an ending inventory of 3,500 units. During September, the company produced 35,000 garments but sold 38,500 units at $125 per unit. The September manufacturing costs and selling and administrative expenses were as follows:
a. Prepare an income statement according to the absorption costing concept for September.
b. Prepare an income statement according to the variable costing concept for September.
Manufacturing costs in September beginning inventory: units unit cost total cost Variable 3,500 $50.00 $175,000 Fixed 3,500 19.00 66,500 Total $69.00 $241,500 September manufacturing costs: Variable 35,000 $50.00 $1,750,000 Fixed 35,000 20.90 731,500 Total $70.90 $2,481,500 Selling and administrative expenses: Variable $950,950 Fixed 304,200 Total $1,255,150Explanation / Answer
Solution:
a. Income Statement according to the absorption costing concept for September
Income Statement for September 2014
(Absorption Costing)
Particulars
Amount
Sales (38,500 x $125)
$4,812,500
Manufacturing Cost
Variable Manufacturing Cost (35,000 x $50)
$1,750,000
Fixed manufacturing cost (given)
$731,500
Cost of Production
$2,481,500
Add: Beginning Inventory (Valued at Total manufacturing Cost)
$241,500
Cost of Goods Available for Sale
$2,723,000
Less: Ending Inventory
$0
Cost of Goods Sold
$2,723,000
Add: Selling and administrative expenses:
Variable (given)
$950,950
Fixed (Given)
$304,200
Total Cost
$3,978,150
Profit (Sales - Total Cost)
$834,350
Note 1 – Under Absorption Costing Beginning Inventory is valued at total manufacturing cost (variable + fixed) of previous period. Hence, Value of Beginning Inventory = Total Manufacturing Cost (given) = $241,500 (Variable + Fixed)
b. Income statement according to the variable costing concept for September
Income Statement for September 2014
(Variable Costing)
Particulars
Amount
Sales (38,500 x $125)
$4,812,500
Variable Manufacturing Costs:
Variable Manufacturing Cost (35,000 x $50)
$1,750,000
Cost of Goods Production
$1,750,000
Add: Beginning Inventory (Note 2)
$175,000
Cost of Goods Available for Sale
$1,925,000
Less: Ending Inventory (Valued at current variable cost)
$0
Cost of Goods Sold
$1,925,000
Add: Variable Selling and Administrative expenses
$950,950
Total Variable Cost
$2,875,950
Contribution (Sales - Total Variable Cost)
$1,936,550
Add: Fixed Costs
Fixed manufacturing cost (given)
$731,500
Fixed Selling and administrative expenses (given)
$304,200
Total Fixed Cost
$1,035,700
Net Profit (Contribution - Total Fixed Cost)
$900,850
Note 2: Under Variable Costing --- Beginning Inventory is valued at Variable Manufacturing cost of previous period. The Variable Manufacturing Cost of previous period (given) = $175,000
Income Statement for September 2014
(Absorption Costing)
Particulars
Amount
Sales (38,500 x $125)
$4,812,500
Manufacturing Cost
Variable Manufacturing Cost (35,000 x $50)
$1,750,000
Fixed manufacturing cost (given)
$731,500
Cost of Production
$2,481,500
Add: Beginning Inventory (Valued at Total manufacturing Cost)
$241,500
Cost of Goods Available for Sale
$2,723,000
Less: Ending Inventory
$0
Cost of Goods Sold
$2,723,000
Add: Selling and administrative expenses:
Variable (given)
$950,950
Fixed (Given)
$304,200
Total Cost
$3,978,150
Profit (Sales - Total Cost)
$834,350