Question
Morey Company has just completed its first year of operations. The companys absorption costing income statement for the year appears below: MOREY COMPANY Income Statement
Morey Company has just completed its first year of operations. The companys absorption costing income statement for the year appears below:
MOREY COMPANY | ||||||
Income Statement | ||||||
Sales (40,000 units at $33.75 per unit) | $ | 1,350,000 | ||||
Cost of goods sold: | ||||||
Beginning inventory | $ | 0 | ||||
Add cost of goods manufactured (50,000 units at $21 per unit) | 1,050,000 | |||||
Goods available for sale | 1,050,000 | |||||
Less ending inventory (10,000 units at $21 per unit) | 210,000 | 840,000 | ||||
Gross margin | 510,000 | |||||
Selling and administrative expenses | 420,000 | |||||
Operating income | $ | 90,000 | ||||
The companys selling and administrative expenses consist of $300,000 per year in fixed expenses and $3 per unit sold in variable expenses. The companys $21 per unit product cost given above is computed as follows:
Direct materials | $ | 10 | |
Direct labour | 4 | ||
Variable manufacturing overhead | 2 | ||
Fixed manufacturing overhead ($250,000 50,000 units) | 5 | ||
Unit product cost | $ | 21 | |
Required:
1. Redo the companys income statement in the contribution format using variable costing.
2. Reconcile any difference between the operating income on your variable costing income statement and the operating income on the absorption costing income statement above.
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