Estimated Income Statements, usingAbsorptionandVariable Costing

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

Sales (16,800 x $58)$974,400Manufacturing costs (16,800 units):Direct materials588,000Direct labor139,440Variable factory overhead65,520Fixed factory overhead77,280Fixed selling and administrative expenses21,000Variable selling and administrative expenses25,400

The company is evaluating a proposal to manufacture 18,400 units instead of 16,800 units, thus creating an Inventory, October 31 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 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 or enter "0".

Marshall Inc.Absorption Costing Income StatementFor the Month Ending October 3116,800 Units Manufactured18,400 Units ManufacturedSales

$$Cost of goods sold:Cost of goods manufactured

$$Inventory, October 31

Total cost of goods sold

$$Gross profit

$$Selling and administrative expenses

Income from operations$$

Feedback

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. To obtain direct materials for this exercise, calculate unit cost for direct materials as $588,000 16,800 units. Calculate unit cost for direct labor as $139,440 16,800 units. Calculate unit cost for variable factory overhead as $65,520 16,800 units. Calculate unit cost for fixed factory overhead as $77,280 16,800 units. Add together to get total unit cost for under 16,800 units manufactured. For 18,400 units, use the same unit costs for direct materials, direct labor, and variable overhead, but instead recalculate the fixed factory overhead as $77,280 18,400 units and add this to obtain the unit cost at the 18,400 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 18,400 level.

Learning Objective 1andLearning Objective 2.

a. 2.Prepare 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 or enter "0".

Marshall Inc.Variable Costing Income StatementFor the Month Ending October 3116,800 Units Manufactured18,400 Units ManufacturedSales

$$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$$Income from operations

$$