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 (74,800 units) during the first month, creating an ending inventory of 6,800 units. During June, the company produced 68,000 garments during the month but sold 74,800 units at $95 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	6,800		$38.00		$258,400
Fixed	6,800		14.00		95,200
Total			$52.00		$353,600
Manufacturing costs in June:
Variable	68,000		$38.00		$2,584,000
Fixed	68,000		15.40		1,047,200
Total			$53.40		$3,631,200
Selling and administrative expenses in June:
Variable	74,800		18.20		$1,361,360
Fixed	74,800		7.00		523,600
Total			25.20		$1,884,960

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
		$
Cost of goods sold:
	$
		$
		$

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
		$
		$
		$
Fixed costs:
	$
		$

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

Under the method, the fixed manufacturing cost included in the cost of goods sold is matched with the revenues. Under , 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 income statement will have a lower income from operations.