Requirement 1. Prepare two income statements for the year, one using absorption costing and one using variable costing. Begin by preparing the income statement for the year using absorption costing. Quality Industries Income Statement (Absorption Costing) For the Year Ended Sales revenue 500,000 Less: Cost of goods sold 330,000 Gross profit $ 170,000 Less: Operating expenses 106,000 Operating income 64,000 Now prepare the income statement for the year using variable costing. Quality Industries Contribution Margin Income Statement (Variable Costing) For the Year Ended Sales revenue 500000 Choose from any list or enter any number in the input fields and then click Check Answer. Now prepare the income statement for the year using variable costing. Quality Industries Contribution Margin Income Statement (Variable Costing) For the Year Ended Sales revenue 500000 Less: Variable expenses Variable cost of goods sold Variable operating expenses Contribution margin Less: Fixed expenses Fixed manufacturing overhead 90000 Fixed operating expenses 46000 Operating income Choose from any list or enter any number in the input fields and then click Check Answer. Х Data Table $ 50.00 $ 13.00 $ 9.00 $ 165,000 Selling price per unit… Direct material per unit Direct labor per unit Total annual manufacturing overhead. Fixed portion of annual manufacturing overhead Variable operating expenses per unit sold Fixed operating expenses per year in total Units manufactured.. Units sold. $ 90,000 $ 6.00 $ 46,000 15,000 10,000 Print Done
The Correct Answer and Explanation is :
To prepare the income statement for Quality Industries using variable costing, we will need to break down the expenses into variable and fixed components.
Here’s how we approach the calculation:
1. Sales Revenue:
- Sales revenue is provided as $500,000.
2. Variable Expenses:
The variable expenses include:
- Variable cost of goods sold (COGS):
- The variable cost per unit includes direct materials and direct labor.
- Direct materials per unit = $6
- Direct labor per unit = $9
- Variable manufacturing overhead per unit: This can be derived from the total manufacturing overhead minus the fixed portion.
- Total manufacturing overhead = $90,000
- Fixed manufacturing overhead = $90,000 (as provided), so Variable manufacturing overhead = $0.
- Total variable cost per unit = $6 (materials) + $9 (labor) = $15.
- Units sold = 10,000 units.
- Variable cost of goods sold (COGS) = 10,000 units * $15 = $150,000.
- Variable operating expenses:
- The variable operating expenses per unit are provided as $6.
- Total variable operating expenses = 10,000 units * $6 = $60,000.
3. Contribution Margin:
The contribution margin is calculated by subtracting total variable expenses (COGS + operating expenses) from the sales revenue:
- Contribution Margin = Sales Revenue – (Variable COGS + Variable Operating Expenses)
- Contribution Margin = $500,000 – ($150,000 + $60,000) = $290,000.
4. Fixed Expenses:
- Fixed manufacturing overhead = $90,000.
- Fixed operating expenses = $46,000.
5. Operating Income:
Operating income under variable costing is calculated by subtracting total fixed expenses (manufacturing and operating) from the contribution margin:
- Operating Income = Contribution Margin – (Fixed Manufacturing Overhead + Fixed Operating Expenses)
- Operating Income = $290,000 – ($90,000 + $46,000) = $154,000.
Income Statement Using Variable Costing:
Quality Industries Contribution Margin Income Statement (Variable Costing)
For the Year Ended:
| Sales Revenue | $500,000 |
|---|---|
| Less: Variable Expenses | |
| Variable cost of goods sold (COGS) | $150,000 |
| Variable operating expenses | $60,000 |
| Contribution Margin | $290,000 |
| Less: Fixed Expenses | |
| Fixed manufacturing overhead | $90,000 |
| Fixed operating expenses | $46,000 |
| Operating Income | $154,000 |
Explanation:
- Absorption Costing vs. Variable Costing: In absorption costing, both variable and fixed manufacturing costs are included in the cost of goods sold, whereas in variable costing, only variable manufacturing costs are included in COGS. Fixed manufacturing costs are treated as a period expense.
- Contribution Margin: The contribution margin represents the amount available to cover fixed costs and provide a profit. It is higher under variable costing because the fixed manufacturing overhead is not included in the cost of goods sold.
- Operating Income: In this case, the operating income under variable costing is $154,000, which is higher than the operating income under absorption costing ($64,000) due to the exclusion of fixed manufacturing overhead from the cost of goods sold in variable costing.
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