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 (270,000 units) during the first month, creating an ending inventory of 24,000 units. During June, the company produced 246,000 garments during the month but sold 270,000 units at $300 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	24,000		$150.00		$ 3,600,000
Fixed	24,000		32.80		787,200
Total			$182.80		$4,387,200
Manufacturing costs in June:
Variable	246,000		$150.00		$36,900,000
Fixed	246,000		36.00		8,856,000
Total			$186.00		$45,756,000
Selling and administrative expenses in June:
Variable	270,000		$ 45.00		$12,150,000
Fixed	270,000		3.60		972,000
Total			$ 48.60		$13,122,000

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		$
Cost of goods sold:
Cost of goods sold	$
Cost of goods sold
Total cost of goods sold
Cost of goods sold		$
Cost of goods manufactured
Income from operations		$

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a. 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.

Learning Objective 1.

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
		$
		$
Fixed costs:
	$
		$

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b. Under variable costing, the cost of goods manufactured includes only variable manufacturing costs.

Learning Objective 1.

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 change. Thus, when inventory decreases, the absorption costing income statement will have a lower income from operations.