Chapter 18, Problem 45E

1.

To determine

Draft an income statement using full costing

Explanation of Solution

Statement of income statement under full cost method:

Particulars	Prior year		Current year
	Amount ($)	Amount ($)	Amount ($)	Amount ($)
Sales (1)		1,320,000		1,430,000
Less: Cost of goods sold
Beginning inventory	-		24,000
Cost of goods produced (2)	600,000		600,000
Available for sale	600,000		624,000
Less: Ending inventory	24,000(3)		-
Cost of goods sold		576,000		624,000
Gross margin		744,000		806,000
Less: Selling and administrative cost
Variable (4)	12,000		13,000
Fixed	500	12,500	500	13,500
Operating income		731,500		792,500

Table (1)

Therefore, the operating income for the prior year is $731,500 and for the current year is $792,500 respectively

Working notes:

1) Calculate the amount of sales:

For prior year

$\begin{array}{c}\text{Sales}=\left(\text{Units}\times \left(\begin{array}{l}\text{Selling price }\\ \text{per unit}\end{array}\right)\right)\\ =\left(24,000\times \$55\right)\\ =\$1,320,000\end{array}$

For current year:

$\begin{array}{c}\text{Sales}=\left(\text{Units}\times \left(\begin{array}{l}\text{Selling price }\\ \text{per unit}\end{array}\right)\right)\\ =\left(26,000\times \$55\right)\\ =\$1,430,000\end{array}$

2) Calculate the amount of cost of goods sold:

For prior year:

$\begin{array}{c}\text{Cost of goods sold}=\left[\left(\text{Production}\times \text{Variable cost}\right)+\text{Fixed cost}\right]\\ =\left[\left(25,000\times \$16\right)+\$200,000\right]\\ =\$600,000\end{array}$

For current year:

$\begin{array}{c}\text{Cost of goods sold}=\left[\left(\text{Production}\times \text{Variable cost}\right)+\text{Fixed cost}\right]\\ =\left[\left(25,000\times \$16\right)+\$200,000\right]\\ =\$600,000\end{array}$

3) Calculate the ending inventory:

For the prior period:

$\begin{array}{c}\text{Ending inventory}=\left(\text{Units}\times \text{cost per unit}\right)\\ =\left(1,000\times \$24\right)\\ =\$24,000\end{array}$

4) Calculate the variable cost:

For prior period:

$\begin{array}{c}\text{Variable cost}=\left(\text{Units}\times \left(\begin{array}{l}\text{Variable cost }\\ \text{per unit}\end{array}\right)\right)\\ =\left(\$24,000\times \$0.5\right)\\ =\$12,000\end{array}$

For current period:

$\begin{array}{c}\text{Variable cost}=\left(\text{Units}\times \left(\begin{array}{l}\text{Variable cost }\\ \text{per unit}\end{array}\right)\right)\\ =\left(\$26,000\times \$0.5\right)\\ =\$13,000\end{array}$

2.

To determine

Draft an income statement under variable costing.

Explanation of Solution

Statement of income statement under variable cost method:

Particulars	Prior year		Current year
	Amount ($)	Amount ($)	Amount ($)	Amount ($)
Sales (1)		1,320,000		1,430,000
Less: Cost of goods sold
Beginning inventory	-		16,000
Cost of goods produced (5)	400,000		400,000
Available for sale	400,000		416,000
Less: Ending inventory	16,000(6)		-
Cost of goods sold	384,000		416,000
Plus: Variable selling (4)	12,000	396,000	13,000	429,000
Contribution Margin		924,000		1,001,000
Less: Fixed manufacturing cost	200,000		200,000
Fixed selling costs	500	200,500	500	200,500
Operating income		723,500		800,500

Table (2)

Therefore, the operating income for the prior year is $723,500 and for the current year is $800,500 respectively.

Working notes:

5) Calculate the cost of goods sold:

For prior period:

$\begin{array}{c}\text{Cost of goods sold}=\left(\text{Production}\times \text{Variable cost}\right)\\ =\left(25,000\times \$16\right)\\ =\$400,000\end{array}$

For current period:

$\begin{array}{c}\text{Cost of goods sold}=\left(\text{Production}\times \text{Variable cost}\right)\\ =\left(25,000\times \$16\right)\\ =\$400,000\end{array}$

6) Calculate the closing inventory:

For prior period:

$\begin{array}{c}\text{Closing inventory}=\left(\text{Units}\times \text{Cost per unit}\right)\\ =\left(1,000\times \$16\right)\\ =\$16,000\end{array}$

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)	1,000	(1,000)
Fixed overhead rate (b)	$8.00	$8.00
Difference in operating income (a x b)	$8,000	($8,000)

Table (3)

Therefore, the change in operating income for the prior year is $8,000 increase and for the current year is $8,000 decrease.

An increase in inventory units shows the income of full costing higher than the variable costing, since 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.