Andrea Cookie Company produced 5,000 cases of cookies this year. It sold 4,000 c
ID: 2536829 • Letter: A
Question
Andrea Cookie Company produced 5,000 cases of cookies this year. It sold 4,000 cases for $18 each. There were no beginning inventories. Variable manufacturing costs were $30,000, and fixed manufacturing expenses were $20,000. Selling and administrative expenses were $5,000, all fixed. a. Prepare income statements using the variable costing and absorption costing. b. Explain why net income under variable costing is different than net income under absorption costing when the same number of units was sold.
Explanation / Answer
a. Variable costing :
Manufacturing cost per unit = $30000 / 5000 = $6
The income statement using variable costing is as below:
b. Absorption costing:
Manufacturing cost per unit = ($30000 + $20000) / 5000 = $10
The income statement using absorption costing is as below:
b. The difference between net income using absorption costing and variable costing is due to the fixed manufacturing expenses. Fixed manufacturing expenses are considered product cost in absorption costing. The difference in income is due to the fixed manufacturing cost on the closing inventory units.
Particulars Amount ($) Amount ($) Sales ($18*4000) 72000 Less: Cost of goods sold Cost of goods manufactured ($6*5000) 30000 Less: Closing Inventory ($6*1000) 6000 24000 Contribution margin 48000 Less: Period expenses Manufacturing expenses 20000 Selling and administrative expenses 5000 25000 Net operating income 23000