The following is the absorption costing income statement of a manufacturing company:

Sales (40,000 units @ $67.50) $2,700,000
Less cost of goods sold:
Opening inventory 0
Add cost of goods manufactured (50,000 × 42) 2,100,000
———-
Available for use 2,100,000
Less closing inventory 420,000 1,680,000
———- ———-
 Gross margin 1,020,000
 Less selling and administrative expenses 840,000
———-
 Net operating income  180,000
 ———-
Fixed selling and administrative expenses are $600,000. Variable selling and administrative expenses are $6 per unit sold. The unit product cost under absorption costing is computed as follows:
 Direct materials $20
 Direct labor  8
 Variable manufacturing overhead  4
 Fixed manufacturing overhead ($500,000/50,000)  10
——-
Total cost per unit $42
——-

Required:

  1. Prepare a contribution margin income statement using variable costing system.
  2. Reconcile any difference between net operating income figure under variable costing income statement and net operating income figure under absorption costing income statement.

Solution

(1) Income Statement:

Sales (40,000 units @ $67.50) 2,700,000
Less variable cost of goods sold:
Opening inventory 0
Add v. cost of goods manufactured (50,000 units × $32) 1,600,000
———-
Available for sale 1,600,000
Less closing inventory (10,000 units × $32) 320,000 1,280,000
———- ———-
Gross contribution margin 1,420,000
 Less variable selling and administrative expenses 240,000
———-
Contribution margin  1,180000
Less fixed expenses:
Manufacturing 500,000
Selling and admin. 600,000 1,100,000
———- ———-
Net operating income 80,000
 ———-

(2) Reconciliation of net operating income:

Net operating income under variable costing 80,000
Fixed manufacturing overhead deferred in inventory (10,000 units × $10) 100,000
——–
Net operating income under absorption costing 100,000
——–