Chapter 18, Problem 44E

1.

To determine

Prepare income statement under full costing method.

Explanation of Solution

Income statement under full cost method:

Income Statement
Particulars	Prior year		Current year
	Amount ($)	Amount ($)	Amount ($)	Amount ($)
Sales (1)		5,400		6,600
Less: Cost of goods sold
Beginning inventory	-		220
Cost of goods produced (2)	2,200		2,200
Available for sale	2,200		2,420
Less: Ending inventory	220(3)		-
Cost of goods sold		1,980		2,420
Gross margin		3,420		4,180
Less: Selling and administrative cost
Variable (4)	720		880
Fixed	500	1,220	500	1,380
Operating income		2,200		2,800

Table (1)

Therefore, the operating income for the prior year is $2,200 and for the current year is $2,800 respectively.

Working notes:

1) Calculate the sales:

For prior year

$\begin{array}{c}\text{Sales}=\left(\text{Units}\times \text{Selling price per unit}\right)\\ =\left(1,800\times \$3\right)\\ =\$5,400\end{array}$

For current year:

$\begin{array}{c}\text{Sales}=\left(\text{Units}\times \text{Selling price per unit}\right)\\ =\left(2,200\times \$3\right)\\ =\$6,600\end{array}$

2) Calculate the cost of goods sold:

For prior year:

$\begin{array}{c}\text{Cost of goods sold}=\left[\left(\text{Production}\times \text{Variable cost}\right)+\text{Fixed cost}\right]\\ =\left[\left(2,000\times \$0.6\right)+\$1,000\right]\\ =\$2,200\end{array}$

For current year:

$\begin{array}{c}\text{Cost of goods sold}=\left[\left(\text{Production}\times \text{Variable cost}\right)+\text{Fixed cost}\right]\\ =\left[\left(2,000\times \$0.6\right)+\$1,000\right]\\ =\$2,200\end{array}$

3) Calculate the ending inventory:

For the prior period:

$\begin{array}{c}\text{Ending inventory}=\left(\text{Units}\times \text{cost per unit}\right)\\ =\left(200\times \$1.1\right)\\ =\$220\end{array}$

4) Calculate the variable cost:

For prior period:

$\begin{array}{c}\text{Variable cost}=\left(\text{Units}\times \text{Variable cost per unit}\right)\\ =\$1,800\times \$0.4\\ =\$720\end{array}$

For current period:

$\begin{array}{c}\text{Variable cost}=\left(\text{Units}\times \text{Variable cost per unit}\right)\\ =\$2,200\times \$0.4\\ =\$880\end{array}$

2.

To determine

Prepare the statement showing income statement under variable costing method.

Explanation of Solution

Income statement under variable costing method:

Income Statement
Particulars	Prior year		Current year
	Amount ($)	Amount ($)	Amount ($)	Amount ($)
Sales (1)		5,400		6,600
Less: Cost of goods sold
Beginning inventory	-		120
Cost of goods produced (5)	1,200		1,200
Available for sale	1,200		1,320
Less: Ending inventory	120 (6)		-
Cost of goods sold	1,080		1,320
Plus: Variable selling (4)	720	1,800	880	2,200
Contribution Margin		3,600		4,400
Less: Fixed manufacturing cost		1,000		1,000
Fixed selling costs		500		500
Operating income		2,100		2,900

Table (2)

Therefore, the operating income for the prior year is $2,100 and for the current year is $2,900 respectively.

Working notes:

5) Calculate the cost of goods sold:

For prior period:

$\begin{array}{c}\text{Cost of goods sold}=\left(\text{Production}\times \text{Variable cost}\right)\\ =\left(2,000\times 0.6\right)\\ =\$1,200\end{array}$

For current period:

$\begin{array}{c}\text{Cost of goods sold}=\left(\text{Production}\times \text{Variable cost}\right)\\ =\left(2,000\times 0.6\right)\\ =\$1,200\end{array}$

6) Calculate the closing inventory:

For prior period:

$\begin{array}{c}\text{Closing inventory}=\left(\text{Units}\times \text{Cost per unit}\right)\\ =\left(200\times \$0.6\right)\\ =\$120\end{array}$

3.

To determine

Prepare reconciliation statement showing the difference in operating income.

Explanation of Solution

Statement of reconciliation showing the difference in operating income:

Particulars	Prior year	Current year
Change in inventory (a)	200	(200)
Fixed overhead rate (b)	$0.5	0.5
Difference in operating income (a x b)	$100	$100

Table (3)

Therefore, the change in operating income for the prior year is $100 increase and for the current year is $100 decrease.

An increase in inventory units shows the income of full costing higher than the variable costing as there is excess of fixed cost in inventory than the previous year.

When the inventory unit decreases, the operating income of variable costing is higher than full costing. Here, as the inventory decreases the operating income for variable costing is higher than the full costing.