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 (20,000 x $71)	$1,420,000
Manufacturing costs (20,000 units):
Direct materials	852,000
Direct labor	202,000
Variable factory overhead	94,000
Fixed factory overhead	112,000
Fixed selling and administrative expenses	30,500
Variable selling and administrative expenses	36,800

The company is evaluating a proposal to manufacture 22,400 units instead of 20,000 units, thus creating an Inventory, October 31 of 2,400 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 20,000 and 22,400 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
	20,000 Units Manufactured	22,400 Units Manufactured
Sales	$	$
Cost of goods sold:
Cost of goods manufactured	$	$
Inventory, October 31
Total cost of goods sold	$	$
Gross profit	$	$
Selling and administrative expenses
Income from operations	$	$

a. 2. Prepare an estimated income statement, comparing operating results if 20,000 and 22,400 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
	20,000 Units Manufactured	22,400 Units Manufactured
	$	$
Variable cost of goods sold:
	$	$
	$	$
	$	$
	$	$
Fixed costs:
	$	$
Total fixed costs	$	$
	$	$

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.