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 (28,800 x $101)	$2,908,800
Manufacturing costs (28,800 units):
Direct materials	1,751,040
Direct labor	414,720
Variable factory overhead	192,960
Fixed factory overhead	230,400
Fixed selling and administrative expenses	62,700
Variable selling and administrative expenses	75,800

The company is evaluating a proposal to manufacture 32,000 units instead of 28,800 units, thus creating an Inventory, October 31 of 3,200 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 28,800 and 32,000 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
	28,800 Units Manufactured	32,000 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	$	$

Feedback

a. 1. Recall that under absorption costing, the cost of goods manufactured includes direct materials, direct labor, and factory overhead costs. Both fixed and variable factory costs are included as part of factory overhead. To obtain direct materials for this exercise, calculate unit cost for direct materials as $1,751,040 28,800 units. Calculate unit cost for direct labor as $414,720 28,800 units. Calculate unit cost for variable factory overhead as $192,960 28,800 units. Calculate unit cost for fixed factory overhead as $230,400 28,800 units. Add together to get total unit cost for under 28,800 units manufactured. For 32,000 units, use the same unit costs for direct materials, direct labor, and variable overhead, but instead recalculate the fixed factory overhead as $230,400 32,000 units and add this to obtain the unit cost at the 32,000 unit level. Sales - (cost of goods manufactured - Inventory, October 31) = Gross profit; gross profit - selling and administrative expenses = income from operations. Remember that the Inventory, October 31 adjustment will only be necessary at the 32,000 level.

Learning Objective 1 and Learning Objective 2.

a. 2. Prepare an estimated income statement, comparing operating results if 28,800 and 32,000 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
	28,800 Units Manufactured	32,000 Units Manufactured
Sales	$	$
Variable cost of goods sold:
Variable cost of goods manufactured	$	$
Inventory, October 31
Total variable cost of goods sold	$	$
Manufacturing margin	$	$
Variable selling and administrative expenses
Contribution margin	$	$
Fixed costs:
Fixed factory overhead	$	$
Fixed selling and administrative expenses
Total fixed costs	$	$
Income from operations	$	$