1. Estimated Income Statements, using The reporting of the costs of manufactured products, normally direct materials, direct labor, and factory overhead, as product costs.Absorption and The concept that considers the cost of products manufactured to be composed only of those manufacturing costs that increase or decrease as the volume of production rises or falls (direct materials, direct labor, and variable factory overhead).Variable Costing

   Prior to the first month of operations ending October 31 Marshall Inc. estimated the following operating results:

   Sales (30,400 x $106)	$3,222,400
   Manufacturing costs (30,400 units):
   Direct materials	1,939,520
   Direct labor	459,040
   Variable factory overhead	215,840
   Fixed factory overhead	255,360
   Fixed selling and administrative expenses	69,500
   Variable selling and administrative expenses	84,000

   The company is evaluating a proposal to manufacture 33,600 units instead of 30,400 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 30,400 and 33,600 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
   	30,400 Units Manufactured	33,600 Units Manufactured
   Contribution margin Fixed manufacturing costs Inventory, October 31 Sales Selling and administrative expenses	$	$
   Cost of goods sold:
   Cost of goods manufactured Cost of goods sold Fixed manufacturing costs Inventory, October 31 Sales	$	$
   Contribution margin Cost of goods manufactured Fixed manufacturing costs Inventory, October 31 Selling and administrative expenses
   Sales Selling and administrative expenses Total cost of goods manufactured Total cost of goods sold Total fixed manufacturing costs	$	$
   Contribution margin Fixed manufacturing costs Fixed selling and administrative expenses Gross profit Inventory, October 31 Sales	$	$
   Contribution margin Cost of goods sold Inventory, October 31 Sales Selling and administrative expenses
   Income from operations	$	$

   Feedback

   a. 2. Prepare an estimated income statement, comparing operating results if 30,400 and 33,600 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
   	30,400 Units Manufactured	33,600 Units Manufactured
   Contribution margin Fixed factory overhead Sales Variable cost of goods manufactured Variable cost of goods sold	$	$
   Variable cost of goods sold:
   Inventory Sales Variable cost of goods manufactured Variable cost of goods sold Variable selling and administrative expenses	$	$
   Contribution margin Fixed factory overhead Inventory, October 31 Manufacturing margin Sales
   Contribution margin Inventory Total variable cost of goods manufactured Total variable cost of goods sold Total variable selling and administrative expenses	$	$
   Contribution margin Fixed factory overhead Manufacturing margin Sales Variable cost of goods manufactured	$	$
   Contribution margin Fixed factory overhead Manufacturing margin Variable cost of goods sold Variable selling and administrative expenses
   Contribution margin Fixed factory overhead Manufacturing margin Sales Variable cost of goods manufactured	$	$
   Fixed costs:
   Fixed factory overhead Fixed inventory Fixed manufacturing margin Fixed sales Variable selling and administrative expenses	$	$
   Fixed contribution margin Fixed selling and administrative expenses Fixed inventory Variable cost of goods sold Variable selling and administrative expenses
   Total fixed costs	$	$
   Income from operations Loss from operations	$	$

   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

   • fixed factory
   • variable
   overhead cost over a
   • fewer
   • larger
   number of units. Thus, the cost of goods sold is
   • less
   • more
   . The difference can also be explained by the amount of
   • fixed factory
   • variable
   overhead cost included in the
   • beginning
   • ending
   inventory.