Opu and Mamun started a new business manufacturing hair dying cream. They both kept separate set of accounts of their business. However, at the end of the first year of operations their net incomes didnt match. A fight was about to start between the two owing to discrepancy in net incomes. Rafsan, their friend, asked them to present their income statements. As such information relating to the businesss the first year of operation follow:

Production in units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27000
Sales in units. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22000
Variable manufacturing cost per unit produced. . . . . . . . . . . . . $9
Variable selling and administrative expense per unit sold. . . . . $3
Fixed manufacturing overhead costs (total) . . . . . . . . . . . . . . . $326100


Using the above data, Mamun presented the following income statement:
Sales (22000 units) . . . . . . . . . . . . . . . . . . . . . . . . . . $946000
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . $463711.11111111107
Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $482288.88888888893
Selling and administrative expenses . . . . . . . . . . . . $262500
Net operating income. . . . . . . . . . . . . . . . . . . . . . . . . $219788.88888888893

Opu, on the other hand asked for your help to prepare a variable costing income statement. Prepare a variable costing income statement of Opu and Mamun (5 marks) and explain why the net income between the two methods differ (2 marks).

Am 946 Variable Costing Income Statement Particulars Sales (22,000*43) Less: Variable Cost Variable Manufacturing Cost (27,000*9) Variable selling and administrative cost (3*22, 000) Contribution Less: Fixed Costs Fixed manufacturing overhead cost Net operating income (24 (66 637 (32 310 It can be seen that there exists a difference of $(310, 900-219, 788.89) =$91, 111.11 between the two income statements. The reason for the same is that under variable costing income statement first variable costs actually incurred are deducted to get contribution wherefrom fixed cost is further deducted to get the net operating income. But in the income statement provided in the question, cost of goods sold considers the manufacturing cost of only the goods actually sold and ignores the cost incurred to produce the remaining 5,000 units. Thus, cost of goods sold= (22000*9)+ (326100/27000*22000)=463711.11 approx