Prepare an estimated income statement, comparing operating results if 23,200 and 25,600 units are manufactured in the absorption costing format. If an amount box does not require an entry leave it blank. Marshall Inc. Absorption Costing Income Statement For the Month Ending October 31 23,200 Units Manufactured 25,600 Units Manufactured Sales $ $ Cost of goods sold: Cost of goods manufactured $ $ Inventory, October 31 Total cost of goods sold $ $ Gross profit $ $ Selling and administrative expenses Operating income $ $
Prepare an estimated income statement, comparing operating results if 23,200 and 25,600 units are manufactured in the absorption costing format. If an amount box does not require an entry leave it blank. Marshall Inc. Absorption Costing Income Statement For the Month Ending October 31 23,200 Units Manufactured 25,600 Units Manufactured Sales $ $ Cost of goods sold: Cost of goods manufactured $ $ Inventory, October 31 Total cost of goods sold $ $ Gross profit $ $ Selling and administrative expenses Operating income $ $
Prepare an estimated income statement, comparing operating results if 23,200 and 25,600 units are manufactured in the absorption costing format. If an amount box does not require an entry leave it blank. Marshall Inc. Absorption Costing Income Statement For the Month Ending October 31 23,200 Units Manufactured 25,600 Units Manufactured Sales $ $ Cost of goods sold: Cost of goods manufactured $ $ Inventory, October 31 Total cost of goods sold $ $ Gross profit $ $ Selling and administrative expenses Operating income $ $
Estimated Income Statements, using Absorption and Variable Costing
Prior to the first month of operations ending October 31, Marshall Inc. estimated the following operating results:
Sales (23,200 x $81)
$1,879,200
Manufacturing costs (23,200 units):
Direct materials
1,127,520
Direct labor
266,800
Variable factory overhead
125,280
Fixed factory overhead
148,480
Fixed selling and administrative expenses
40,400
Variable selling and administrative expenses
48,800
The company is evaluating a proposal to manufacture 25,600 units instead of 23,200 units, thus creating an ending inventory of 2,400 units. Manufacturing the additional units will not change sales, unit variable factory overhead costs, total fixed factory overhead cost, or total selling and administrative expenses.
a. 1. Prepare an estimated income statement, comparing operating results if 23,200 and 25,600 units are manufactured in the absorption costing format. If an amount box does not require an entry leave it blank.
Marshall Inc.
Absorption Costing Income Statement
For the Month Ending October 31
23,200 Units Manufactured
25,600 Units Manufactured
Sales
$
$
Cost of goods sold:
Cost of goods manufactured
$
$
Inventory, October 31
Total cost of goods sold
$
$
Gross profit
$
$
Selling and administrative expenses
Operating income
$
$
Feedback
a. 1. Recall that under absorption costing, the cost of goods manufactured includes direct materials, direct labor, and factory overhead costs. Both fixed and variable factory costs are included as part of factory overhead. Calculate unit cost for direct materials, direct labor, variable factory overhead, fixed factory overhead. Add together to get total unit cost. For 25,600 units, use the same unit costs for direct materials, direct labor, and variable overhead, but instead recalculate the fixed factory overhead and add this to obtain the unit cost at the 25,600 unit level. Sales - (cost of goods manufactured - Inventory, October 31) = Gross profit; gross profit - selling and administrative expenses = income from operations. Remember that the Inventory, October 31 adjustment will only be necessary at the 25,600 level.
a. 2. Prepare an estimated income statement, comparing operating results if 23,200 and 25,600 units are manufactured in the variable costing format. If an amount box does not require an entry leave it blank.
Marshall Inc.
Variable Costing Income Statement
For the Month Ending October 31
23,200 Units Manufactured
25,600 Units Manufactured
Sales
$
$
Variable cost of goods sold:
Variable cost of goods manufactured
$
$
Inventory, October 31
Total variable cost of goods sold
$
$
Manufacturing margin
$
$
Variable selling and administrative expenses
Contribution margin
$
$
Fixed costs:
Fixed factory overhead
$
$
Fixed selling and administrative expenses
Total fixed costs
$
$
Operating income
$
$
Feedback
a. 2. Recall that under variable costing, fixed factory overhead costs are not a part of the cost of goods manufactured. Instead, fixed factory overhead costs are treated as a period expense. Therefore, recast the income statement such that Net sales - variable cost of products sold = Manufacturing margin; Manufacturing margin - variable selling and administrative expenses = Contribution margin; Contribution margin - (fixed manufacturing costs + fixed selling and administrative expenses) = income from operations. Remember that the variable cost of manufacturing will be the same at both levels after adjusting for Inventory, October 31. Thus manufacturing margin should also be the same for both levels.
b. What is the reason for the difference in operating income reported for the two levels of production by the absorption costing income statement?
The increase in income from operations under absorption costing is caused by the allocation of fixed factory overhead cost over a fewer number of units. Thus, the cost of goods sold is less . The difference can also be explained by the amount of fixed factory overhead cost included in the beginning inventory.
Feedback
b. Consider how each method treats the fixed manufacturing costs and the affect it has on net income.
Definition Definition Total cost of procuring or producing a product or the cost that an individual or business owner undertakes for the manufacturing of goods.
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