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

Required:

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

Solution

(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.