Income Statements under Absorption and Variable Costing Patagucci Inc. manufactu
ID: 2528940 • Letter: I
Question
Income Statements under Absorption and Variable Costing
Patagucci Inc. manufactures and sells athletic equipment. The company began operations on August 1, 2016, and operated at 100% of capacity (75,900 units) during the first month, creating an ending inventory of 6,900 units. During September, the company produced 69,000 garments but sold 75,900 units at $85 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.
c. What is the reason for the difference in the amount of income from operations reported in (a) and (b)?
Under the method, the fixed manufacturing cost included in the cost of goods sold is matched with the revenues. Under , all of the fixed manufacturing cost is deducted in the period in which it is incurred, regardless of the amount of inventory change. Thus, when inventory decreases, the income statement will have a lower income from operations.
Number of Units Unit Cost TotalCost Manufacturing costs in September beginning inventory: Variable 6,900 $34.00 $234,600 Fixed 6,900 13.00 89,700 Total $47.00 $324,300 September manufacturing costs: Variable 69,000 $34.00 $2,346,000 Fixed 69,000 14.30 986,700 Total $48.30 $3,332,700 Selling and administrative expenses: Variable $1,282,710 Fixed 599,600 Total $1,882,310
Explanation / Answer
Solution a:
Solution b:
Solution c:
Under the absorption costing method, the fixed manufacturing cost included in the cost of goods sold is matched with the revenues. Under variable costing method, all of the fixed manufacturing cost is deducted in the period in which it is incurred, regardless of the amount of inventory change. Thus, when inventory decreases, the income statement will have a lower income from operations.
Income Statement - Absorption Cosing - September Particulars September Details Amount Sales 75900*85 $6,451,500.00 Cost of Goods Sold $324,300 + $3,332,700 $3,657,000.00 Gross Profit $2,794,500.00 Variable Selling & Administrative Expenses $1,282,710.00 Fixed Selling & Administrative Expenses $599,600.00 Net Operating Income $912,190.00