Problem-1 (Variable costing income statement and reconciliation)

Absorption costing income statement of ARORA company for the first two years of operations is as follows:


*$6 per unit sold

The manufacturing cost per unit is as follows:

  • Direct materials: $16
  • Direct labor: $20
  • Variable manufacturing overhead: $4
  • Fixed manufacturing overhead: $28

Sales and production data for two years is given below:

Units produced:

  • Year-1: 25,000 units
  • Year-2: 25,000 units

Units sold: 

  • Year-1: 20,000 units
  • Year-2: 30,000 units


  1. Prepare a variable costing income statement using above information.
  2. Reconcile net operating income figures obtained under two costing systems.


(1) Variable costing income statement:


(2) Reconciliation of net operating income:


For reconciliation of net operating income figures:

When fixed manufacturing overhead cost is deferred in inventory, it is added to the variable costing income figure and when fixed manufacturing cost is released from inventory, it is deducted from the variable costing income figure.

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5 Comments on Problem-1 (Variable costing income statement and reconciliation)

  1. K.Ravi kishore


  2. Antonio Tuvici

    hello, i have a question on absorption costing, how does it work under a service firm?
    here is the question
    Viti Boutique imports designer clothing manufactured by subcontractors in New Zealand. Clothing is a seasonal product. The goods must be ready for sale prior to the start of the season. Any goods left over at the end of the season usually must be sold at steep discounts. Viti Boutique prepares a dress design and selects fabrics approximately six months before a given season. It receives these goods and distributes them at the start of the season. Based on past experience, Viti Boutique estimates that 60 percent of a particular lot of dresses will be unsold at the end of the season and will be marked down to half of the initial retail price. Even with the markdown, a substantial number of dresses will remain unsold and will be returned to Viti Boutique and destroyed. Although a large number of dresses must be discounted and destroyed, Viti Boutique needs to place a minimum order of 1,000 dresses to have a sufficient selection of styles and sizes to market the design.

    Recently, Viti Boutique placed an order for 1,000 dresses of a particular design for $25,000 plus import duties of $5,000 and a $7 commission for each dress sold at retail, regardless of the price. Return mailing and disposing of each unsold dress cost $3 after the end of the markdown period.


    1. Use absorption costing to compute the cost of each dress in this lot of dresses.



  4. M Fernando

    I have a Cost Accounting Problem , any expert can help me to solving it ?
    Q: Big Ben company established new manufacturing unit of casual gents shirts: each shirt company sell at US$ 48 each, it coat variable cost to make 1 shirt US$ 21 each (such as materials, accessories, labor, ect), and cost US$ 68,000 per month fixed cost to run the factory (such as, salaries, rent, fixed overheard, ect). And company most like sell 3000 peace of shirts per month.

    What is the gross margin per shirt
    What is the total gross margin for shirts sold during the month

    1. atif

      sales 3000*48 144000 48
      less: COGS:
      variable expenses
      (21*3000) 63000 21
      GROSS MARGIN 81000 27(gross margin/unit)

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