Managerial Accounting
Managerial Accounting
7th Edition
ISBN: 9781260247886
Author: Wild
Publisher: MCG
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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.

Expert Solution & Answer
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Explanation of Solution

The income statement of the company under absorption costing is,

    H.B. Company Income Statement (Absorption Costing)
    Particulars Amount($) Amount($)
    Sales ( 225×$1,600 ) 360,000
    Cost of Goods Sold (Working Note) (1,240,000)
    Gross Margin 3,080,000
    Variable Selling & Administrative Overheads ( 20,000×$18 ) (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,

    Cost of Goods Sold=Number of Units Sold×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 ( $160,000 20,000 ) 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.

    Cost of Goods Sold=20,000×$62 =1,240,000

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