Income Statements under Absorption Costing and Variable Costing

Joplin Industries Inc. manufactures and sells high-quality sporting goods equipment under its highly recognizable J-Sports logo. The company began operations on May 1 and operated at 100% of capacity (63,800 units) during the first month, creating an ending inventory of 5,800 units. During June, the company produced 58,000 garments during the month but sold 63,800 units at $105 per unit. The June manufacturing costs and selling and administrative expenses were as follows:

	Number of Units		Unit Cost		Total Cost
Manufacturing costs in June 1 beginning inventory:
Variable	5,800		$42.00		$243,600
Fixed	5,800		16.00		92,800
Total			$58.00		$336,400
Manufacturing costs in June:
Variable	58,000		$42.00		$2,436,000
Fixed	58,000		17.60		1,020,800
Total			$59.60		$3,456,800
Selling and administrative expenses in June:
Variable	63,800		20.80		$1,327,040
Fixed	63,800		7.00		446,600
Total			27.80		$1,773,640

Question Content Area

a. Prepare an income statement according to the absorption costing concept for June.

Joplin Industries Inc. Absorption Costing Income Statement For the Month Ended June 30

Sales		$6,699,000
Cost of goods sold:
Beginning Inventory	$336,400
Cost of goods manufactured	$
Total cost of goods sold		$
Gross profit		$
Selling and administrative expenses		$
Income from operations		$

b. Prepare an income statement according to the variable costing concept for June.

Joplin Industries Inc. Variable Costing Income Statement For the Month Ended June 30

Sales		$
Variable cost of goods sold		$
Manufacturing margin		$
Variable selling and administrative expenses		$
Contribution margin		$
Fixed costs:
Fixed manufacturing costs	$
Fixed selling and administrative expenses	$
Total fixed costs		$
Income from operations		$

c. What is the reason for the difference in the amount of income from operations reported in (a) and (b)?

Under the absorption costing method, the fixed manufacturing cost included in the cost of goods sold is matched with the revenues. Under variable costing, all of the fixed manufacturing cost is deducted in the period in which it is incurred, regardless of the amount of inventory changed. Thus, when inventory decreases, the absorption costing income statement will have a lower income from operations.