Estimated Income Statements, using Absorption and Variable Costing

Prior to the first month of operations ending October 31, Marshall Inc. estimated the following operating results:

Sales (40,000 $90)	$3,600,000
Manufacturing costs (40,000 units):
Direct materials	1,440,000
Direct labor	480,000
Variable factory overhead	240,000
Fixed factory overhead	120,000
Fixed selling and administrative expenses	75,000
Variable selling and administrative expenses	200,000

The company is evaluating a proposal to manufacture 50,000 units instead of 40,000 units, thus creating an ending inventory of 10,000 units. Manufacturing the additional units will not change sales, unit variable factory overhead costs, total fixed factory overhead cost, or total selling and administrative expenses.

a. 1. Prepare an estimated income statement, comparing operating results if 40,000 and 50,000 units are manufactured in the absorption costing format. If an amount box does not require an entry leave it blank or enter 0.

Marshall Inc.
Absorption Costing Income Statement
For the Month Ending October 31
	40,000 Units Manufactured	50,000 Units Manufactured
Sales	$	$
Cost of goods sold:
Cost of goods manufactured	$	$
	$	$
	$	$
	$	$

a. 2. Prepare an estimated income statement, comparing operating results if 40,000 and 50,000 units are manufactured in the variable costing format. If an amount box does not require an entry leave it blank or enter 0.

Marshall Inc.
Variable Costing Income Statement
For the Month Ending October 31
	40,000 Units Manufactured	50,000 Units Manufactured
	$	$
Variable cost of goods sold:
Variable cost of goods manufactured:		$
	$	$
	$	$
	$	$
Fixed costs:
	$	$
Total fixed costs	$	$
	$	$

Feedback

b. What is the reason for the difference in income from operations reported for the two levels of production by the absorption costing income statement?

The increase in income from operations under absorption costing is caused by the allocation of overhead cost over a number of units. Thus, the cost of goods sold is . The difference can also be explained by the amount of overhead cost included in the inventory.