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 (27,200 x $96)	$2,611,200
Manufacturing costs (27,200 units):
Direct materials	1,572,160
Direct labor	372,640
Variable factory overhead	174,080
Fixed factory overhead	206,720
Fixed selling and administrative expenses	56,200
Variable selling and administrative expenses	68,000

The company is evaluating a proposal to manufacture 30,400 units instead of 27,200 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.

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a. 1. Prepare an estimated income statement, comparing operating results if 27,200 and 30,400 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

	27,200 Units Manufactured	30,400 Units Manufactured
Contribution marginFixed manufacturing costsInventory, October 31SalesSelling and administrative expensesSales	$Sales	$Sales
Cost of goods sold:
Cost of goods manufacturedCost of goods soldFixed manufacturing costsInventory, October 31SalesCost of goods manufactured	$Cost of goods manufactured	$Cost of goods manufactured
Contribution marginCost of goods manufacturedFixed manufacturing costsInventory, October 31Selling and administrative expensesInventory, October 31	Inventory, October 31	Inventory, October 31
SalesSelling and administrative expensesTotal cost of goods manufacturedTotal cost of goods soldTotal fixed manufacturing costsTotal cost of goods sold	$Total cost of goods sold	$Total cost of goods sold
Fixed manufacturing costsFixed selling and administrative expensesGross profitInventory, October 31SalesGross profit	$Gross profit	$Gross profit
Contribution marginCost of goods soldInventory, October 31SalesSelling and administrative expensesSelling and administrative expenses	Selling and administrative expenses	Selling and administrative expenses
Operating incomeOperating lossOperating income	$Operating income	$Operating income

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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. Calculate unit cost for direct materials, direct labor, variable factory overhead, fixed factory overhead. Add together to get total unit cost. For 30,400 units, use the same unit costs for direct materials, direct labor, and variable overhead, but instead recalculate the fixed factory overhead and add this to obtain the unit cost at the 30,400 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 30,400 level.

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a. 2. Prepare an estimated income statement, comparing operating results if 27,200 and 30,400 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

	27,200 Units Manufactured	30,400 Units Manufactured
Contribution marginFixed factory overheadSalesVariable cost of goods manufacturedVariable cost of goods soldSales	$Sales	$Sales
Variable cost of goods sold:
InventorySalesVariable cost of goods manufacturedVariable cost of goods soldVariable selling and administrative expensesVariable cost of goods manufactured	$Variable cost of goods manufactured	$Variable cost of goods manufactured
Contribution marginFixed factory overheadInventory, October 31Manufacturing marginSalesInventory, October 31	Inventory, October 31	Inventory, October 31
Contribution marginInventoryTotal variable cost of goods manufacturedTotal variable cost of goods soldTotal variable selling and administrative expensesTotal variable cost of goods sold	$Total variable cost of goods sold	$Total variable cost of goods sold
Contribution marginFixed factory overheadManufacturing marginSalesVariable cost of goods manufacturedManufacturing margin	$Manufacturing margin	$Manufacturing margin
Contribution marginFixed factory overheadManufacturing marginVariable cost of goods soldVariable selling and administrative expensesVariable selling and administrative expenses	Variable selling and administrative expenses	Variable selling and administrative expenses
Contribution marginFixed factory overheadManufacturing marginSalesVariable cost of goods manufacturedContribution margin	$Contribution margin	$Contribution margin
Fixed costs:
Fixed factory overheadFixed inventoryFixed manufacturing marginFixed salesVariable selling and administrative expensesFixed factory overhead	$Fixed factory overhead	$Fixed factory overhead
Fixed contribution marginFixed selling and administrative expensesFixed inventoryVariable cost of goods soldVariable selling and administrative expensesFixed selling and administrative expenses	Fixed selling and administrative expenses	Fixed selling and administrative expenses
Total fixed costs	$fill in the blank 4b42bbf9ffc3f9e_28	$fill in the blank 4b42bbf9ffc3f9e_29
Operating incomeOperating lossOperating income	$Operating income	$Operating income

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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 factoryvariablefixed factory

overhead cost over a

fewerlargerlarger

number of units. Thus, the cost of goods sold is

lessmoreless

. The difference can also be explained by the amount of

fixed factoryvariablefixed factory

overhead cost included in the

beginningendingending

inventory.