Chapter 6, Problem 5E

To determine

Income Statement:

It is also known as profit and loss statement. It refers to that financial statement that is made to show the net income or loss that a company or a business has made by the end of a particular period.

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 valuation of closing inventory in this method is consists of both fixed and variable costs.

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 $\left(225\times \$1,600\right)$		360,000
Cost of Goods Sold (Working Note)		(1,240,000)
Gross Margin		3,080,000
Variable Selling & Administrative Overheads $\left(20,000\times \$18\right)$	(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,

$\text{Cost of Goods Sold}=\text{Number of Units Sold}\times \text{Cost Per Unit}$

Where, the cost per unit can be calculated as,

Particulars	Amount ($) Per Unit
Direct Material	20
Direct Labor	28
Variable Overheads	6
Fixed Overheads $\left(\frac{\$160,000}{20,000}\right)$	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.

$\begin{array}{c}\text{Cost of Goods Sold}=20,000\times \$62\\ =1,240,000\end{array}$

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 $\left(20,000\times \$216\right)$		4,320,000
Total Direct Material $\left(20,000\times 20\right)$	(400,000)
Total Direct Labor $\left(20,000\times 28\right)$	(560,000)
Variable Production Overheads $\left(20,000\times \$6\right)$	(120,000)
Variable Selling & Administrative Overheads $\left(20,000\times \$18\right)$	(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.