1.
Prepare the income statement under full costing method for the year 2019.
1.

Explanation of Solution
Statement showing the income statement under full costing:
Income statement | ||||
For the year 2019 | ||||
Under full costing method | ||||
2018 | 2019 | |||
Particulars | Amount ($) | Amount ($) | Amount ($) | Amount ($) |
Sales (1) | 6,704,000 | 5,586,000 | ||
Less: Cost of goods sold | ||||
Beginning inventory (2) | 1,100,000 | 1,925,000 | ||
Cost of good produced (3) | 5,225,000 | 3,162,500 | ||
Cost of good available for sales | 6,325,000 | 5,087,500 | ||
Less: Ending inventory (4) | 1,925,000 | 1,237,500 | ||
Cost of goods sold | 4,400,000 | 3,850,000 | ||
Plus: Production volume variance (5) | 35,000 | 192,500 | ||
Adjusted cost of goods sold | 4,435,000 | 4,042,500 | ||
Gross margin | 2,269,000 | 1,543,500 | ||
Less: Selling and administrative | ||||
Variable (6) | 400,000 | 350,000 | ||
Fixed | 120,000 | 520,000 | 120,000 | 470,000 |
Operating income | 1,749,000 | 1,073,500 |
Table (1)
Therefore, the operating income is 1,073,500.
Working notes:
1) Calculate the sales:
For the year 2018:
For the year 2019:
2) Calculate the beginning inventory:
For the year 2018:
For the year 2019:
3) Calculate the cost of goods produced:
For the year 2018:
For the year 2019:
4) Calculate the ending inventory:
For the year 2018:
For the year 2019:
5) Calculate the production volume variance:
For the year 2018:
For the year 2019:
6) Calculate the variable cost:
For the year 2018:
For the year 2019:
2.
Prepare income statement under variable costing for each period.
2.

Explanation of Solution
Prepare income statement under variable costing.
Particulars | 2018 | 2019 | ||
Amount ($) | Amount ($) | Amount ($) | Amount ($) | |
Sales | 6,704,000 (1) | 5,586,000 (1) | ||
Less: Cost of goods sold | ||||
Beginning inventory (7) | 960,000 | 1,680,000 | ||
Cost of good produced (8) | 4,560,000 | 2,760,000 | ||
Cost of good available for sales | 5,520,000 | 4,440,000 | ||
Less: Ending inventory (9) | 1,680,000 | 1,080,000 | ||
Cost of goods sold | 3,840,000 | 3,360,000 | ||
Plus: Variable selling and administrative (6) | 400,000 | 4,240,000 | 350,000 | 3,710,000 |
Contribution margin | 2,464,000 | 1,876,000 | ||
Less: Fixed | 700,000 | 595,000 | ||
Less: Fixed Selling and administrative | 120,000 | 120,000 | ||
Operating income | 1,644,000 | 1,161,000 |
Table (2)
Therefore, the operating income is $1,644,000 for the year 2018 and $1,161,000 for the year 2019.
Calculate the difference in operating income:
Particular | 2018 | 2019 |
Change in inventory (a) | 600 | (500) |
Fixed | $175 | $175 |
Difference in net income (a x b) | $105,000 | ($87,500) |
Table (3)
An increase in inventory units shows the operating income under full costing method to be higher than the operating income under variable costing method and vice versa.
During the year 2018, the level of inventory units increased hence the operating income under full costing is higher than variable costing method.
During the year 2019, the level of inventory unit decreased hence the operating income under full costing method is lower than variable costing method.
Working notes:
7) Calculate the beginning inventory:
For the year 2018:
For the year 2019:
8) Calculate the cost of goods produced:
For the year 2018:
For the year 2019:
9) Calculate the ending inventory:
For the year 2018:
For the year 2019:
3.
Explain the changes in operating income between variable costing and full costing in a brief memo.
3.

Explanation of Solution
The following is the changes in the operating income between variable costing and full costing:
MEMO
To: Mr. M
From:
Date:
The change in operating income is due to the change in finished inventory that is during the year 2018, the inventory increased by 600 units and during the year 2019, the inventory decreased by 500 units. The income statement under variable costing does not include fixed manufacturing cost but treated as current period cost. So the income statement under variable costing is not affected due to this change.
In case of income statement under full costing, it includes the fixed cost in inventory. Due to this the operating income shows a lesser amount in the period in which there is change in level of inventory. The reason for the decrease is that the fixed cost is included in the cost of goods sold during these periods.
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Chapter 18 Solutions
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