Income Statements under Absorption and Variable Costing Patagucci Inc. manufactu
ID: 2529126 • 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 absorption costing method, the fixed manufacturing cost included in the cost of goods sold is matched with the revenues. Under variable costing , 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 absorption costing 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
Income Statement Under Absorption Costing:
Note:
Under Absorption costing, fixed manufacturing cost are included while valuing inventory. Hence, the same is included in Beginning Inventory.
Income Statement Under Absorption Costing:
Sales 64,51,500 Cost of Good Sold: Opening Inventory (6900 Units)[Refer Note] 3,24,300 Variable Mfg. Expenses 23,46,000 Fixed Mfg. Expenses 9,86,700 Ending Inventory - 36,57,000 Gross Profit 27,94,500 Selling & Admin Expenses: -Variable 12,82,710 - Fixed 5,99,600 18,82,310 Income From Operations 9,12,190