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 (28,000 x $98)	$2,744,000
Manufacturing costs (28,000 units):
Direct materials	1,660,400
Direct labor	392,000
Variable factory overhead	184,800
Fixed factory overhead	218,400
Fixed selling and administrative expenses	59,400
Variable selling and administrative expenses	71,900

The company is evaluating a proposal to manufacture 31,200 units instead of 28,000 units, thus creating an ending inventory 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 28,000 and 31,200 units are manufactured in the absorption costing format. If an amount box does not require an entry leave it blank.

Marshall Inc.
Absorption Costing Income Statement
For the Month Ending October 31
	28,000 Units Manufactured	31,200 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
Operating income	$	$

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a. 2. Prepare an estimated income statement, comparing operating results if 28,000 and 31,200 units are manufactured in the variable costing format. If an amount box does not require an entry leave it blank.

Marshall Inc.
Variable Costing Income Statement
For the Month Ending October 31
	28,000 Units Manufactured	31,200 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	$	$
Operating income	$	$

Income Statements under Absorption Costing and Variable Costing

Fresno Industries Inc. manufactures and sells high-quality camping tents. The company began operations on January 1 and operated at 100% of capacity (77,000 units) during the first month, creating an ending inventory of 7,000 units. During February, the company produced 70,000 units during the month but sold 77,000 units at $85 per unit. The February manufacturing costs and selling and administrative expenses were as follows:

	Number of Units		Unit Cost		Total Cost
Manufacturing costs in February 1 beginning inventory:
Variable	7,000		$34.00		$238,000
Fixed	7,000		13.00		91,000
Total			$47.00		$329,000
Manufacturing costs in February:
Variable	70,000		$34.00		$2,380,000
Fixed	70,000		14.30		1,001,000
Total			$48.30		$3,381,000
Selling and administrative expenses in February:
Variable	77,000		$16.90		$1,301,300
Fixed	77,000		7.00		539,000
Total			$23.90		$1,840,300

a. Prepare an income statement according to the absorption costing concept for the month ending February 28.

Fresno Industries Inc.
Absorption Costing Income Statement
For the Month Ended February 28
Sales		$
Cost of goods sold:
Beginning inventory	$
Cost of goods manufactured
Total cost of goods sold
Gross profit		$
Selling and administrative expenses
Operating income		$

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a. 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.

b. Prepare an income statement according to the variable costing concept for the month ending February 28.

Fresno Industries Inc.
Variable Costing Income Statement
For the Month Ended February 28
Sales		$
Variable cost of goods sold
Manufacturing margin		$
Variable selling and administrative expenses
Contribution margin		$
Fixed costs:
Fixed manufacturing costs	$
Fixed selling and administrative expenses
Total fixed costs
Operating income		$