Estimated Income Statements, usingAbsorptionandVariable Costing

Prior to the first month of operations ending July 31, 2014, Muzenski Industries Inc. estimated the following operating results:

The company is evaluating a proposal to manufacture 36,000 units instead of 28,800 units, thus creating an ending inventory of 7,200 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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Hint(s)

Prepare an estimated income statement, comparing operating results if 28,800 and 36,000 units are manufactured in the absorption costing format.

Muzenski Industries Inc.
Absorption Costing Income Statement
For the Month Ending July 31, 2014
28,800 Units Manufactured	36,000 Units Manufactured
	$	$
Cost of goods sold:
	$	$
	$	$
	$	$
	$	$

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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 $1,324,800 28,800 units. Calculate unit cost for direct labor as $316,800 28,800 units. Calculate unit cost for variable factory overhead as $144,000 28,800 units. Calculate unit cost for fixed factory overhead as $216,000 28,800 units. Add together to get total unit cost for under 28,800 units manufactured. For 36,000 units, use the same unit costs for direct materials, direct labor, and variable overhead, but instead recalculate the fixed factory overhead as $216,000 36,000 units and add this to obtain the unit cost at the 36,000 unit level. Sales - (cost of goods manufactured - ending inventory) = Gross profit; gross profit - selling and administrative expenses = income from operations. Remember that the ending inventory adjustment will only be necessary at the 36,000 level.

Learning Objective 1andLearning Objective 2.

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Hint(s)

Prepare an estimated income statement, comparing operating results if 28,800 and 36,000 units are manufactured in the variable costing format.

Muzenski Industries Inc.
Variable Costing Income Statement
For the Month Ending July 31, 2014
28,800 Units Manufactured	36,000 Units Manufactured
	$	$
Variable cost of goods sold:
Variable cost of goods manufactured:		$
	$	$
	$	$
	$	$
Fixed costs:
	$	$
Total fixed costs	$	$
	$	$

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Recall that under variable costing, fixed factory overhead costs are not a part of the cost of goods manufactured. Instead, fixed factory overhead costs are treated as a period expense. Therefore, recast the income statement such that Net sales - variable cost of products sold = Manufacturing margin; Manufacturing margin - variable selling and administrative expenses = Contribution margin; Contribution margin - (fixed manufacturing costs + fixed selling and administrative expenses) = income from operations. Remember that the variable cost of manufacturing will be the same at both levels after adjusting for ending inventory. Thus manufacturing margin should also be the same for both levels.

Learning Objective 1andLearning Objective 2.