Concept explainers
Income Statement:
It is also known as
Variable Costing:
It refers to the method of product costing in which the price of the product is calculated considering only the variable or direct costs or the cost that happened to occurred due to the product only. It is also called as marginal costing as it takes marginal costs while calculating the product cost.
Absorption Costing:
It refers to the method of product costing in which the price of the product is calculated considering all the fixed as well as the variable or direct costs. The
To prepare: An income statement of the given company.
a.

Explanation of Solution
The income statement of the company under absorption costing is,
H.B. Company Income Statement (Absorption Costing) | ||||
Particulars | Amount($) | Amount($) | ||
Sales | 360,000 | |||
Cost of Goods Sold (Working Note) | (1,240,000) | |||
Gross Margin | 3,080,000 | |||
Variable Selling & Administrative | (360,000) | |||
Fixed Selling & Administrative Overheads | (200,000) | (560,000) | ||
Net Income | 2,520,000 | |||
Table (1) |
The net income under absorption costing for the given company is $2,520,000.
Working Note:
Calculation of cost of goods sold is,
Where, the cost per unit can be calculated as,
Particulars | Amount ($) Per Unit | |||
Direct Material | 20 | |||
Direct Labor | 28 | |||
Variable Overheads | 6 | |||
Fixed Overheads | 8 | |||
Total Cost Per Unit | 62 | |||
Table (2) |
Substitute 20,000 for number of units sold and $62 for cost per unit in the above formula.
Thus, the net income under absorption costing for the given company is $2,520,000.
b.
Solution:
The income statement of the company under variable costing is,
R. Company Income Statement (Variable Costing) | ||||
Particulars | Amount ($) | Amount($) | ||
Sales | 4,320,000 | |||
Total Direct Material | (400,000) | |||
Total Direct Labor | (560,000) | |||
Variable Production Overheads | (120,000) | |||
Variable Selling & Administrative Overheads | (360,000) | (1,440,000) | ||
Contribution Margin | 2,880,000 | |||
Fixed Production Overheads | (160,000) | |||
Fixed Selling & Administrative Overheads | (200,0000) | (360,000) | ||
Net Income | 2,520,000 | |||
Table (3) |
Thus, the net income under variable costing for the given company is $2,520,000.
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