
1.
Draft an income statement using full costing
1.

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
For current year:
2) Calculate the amount of cost of goods sold:
For prior year:
For current year:
3) Calculate the ending inventory:
For the prior period:
4) Calculate the variable cost:
For prior period:
For current period:
2.
Draft an income statement under variable costing.
2.

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 | 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:
For current period:
6) Calculate the closing inventory:
For prior period:
3.
Prepare
3.

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 | $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.
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Chapter 18 Solutions
Cost Management
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