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 (16,800 x $58)	$974,400
Manufacturing costs (16,800 units):
Direct materials	588,000
Direct labor	139,440
Variable factory overhead	65,520
Fixed factory overhead	77,280
Fixed selling and administrative expenses	21,000
Variable selling and administrative expenses	25,400

The company is evaluating a proposal to manufacture 18,400 units instead of 16,800 units, thus creating an ending inventory of 1,600 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 16,800 and 18,400 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
	16,800 Units Manufactured	18,400 Units Manufactured
	$	$
	$	$
	$	$
	$	$
	$	$

a. 2. Prepare an estimated income statement, comparing operating results if 16,800 and 18,400 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
	16,800 Units Manufactured	18,400 Units Manufactured
	$	$
Variable cost of goods sold:
Variable cost of goods manufactured	$	$
	$	$
	$	$
	$	$
Fixed costs:
	$	$
Total fixed costs	$	$
	$	$

b. What is the reason for the difference in operating income 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 fixed factory overhead cost over a fewer number of units. Thus, the cost of goods sold is less . The difference can also be explained by the amount of fixed factory overhead cost included in the beginning inventory.