Good Morning,

I'm just wondering if anyone can please give me some advice about this question I am stuck on, I would really appreciate some explanation into how I get the answers that I am being asked for, as at the moment I haven't found any information / examples of how these statements are done.


This is what has been provided to me:
The business began operations on 1 January, and achieved the following results for the year:

Sales = 24 000 units
Selling price = $15 per unit
Manufacturing costs:
Direct material = $4 per unit
Direct labour = $2 per unit
Variable overhead = $3 per unit
Fixed manufacturing overhead = $100,000
Selling and administrative costs:
Variable = $1 per unit sold
Fixed = $10,000
Production = 25 000 units

This is what is required of me:
1. Prepare an absorption costing profit statement for this business.
2. Prepare a variable costing contribution margin statement for this business.
3. Reconcile the differences between the profits under the two statements by:
(a) identifying the areas where the profit statements differ; and
(b) using the short-cut method.

Any help will be greatly appreciated :)

So far I have:

Absorption Costing Income Statement


Sales (24,000 units×$15 per unit) = $360,000

Less cost of goods sold:
Beginning inventory = $0.00
Cost of goods manufactured (25,000 units×$9per unit) = $225,000

Goods avail able for sale = $225,000
Less ending inventory = $9,000

Cost of goods sold = $216,000

Gross Margin ($360,000 – $216,000) = $144,000

Less selling and administrative expenses:
Variable selling and administrative expenses (24,000 × $1 per unit) = $24,000
Fixed selling and administrative expenses = $10,000

Net operating income ($144,000 – $34,000) = $110,000


Can anyone advise if this is meant to be $9 per unit or $10? Am I on the right track?

Thanks in Advance

So far I have:

Absorption Costing Income Statement


Sales (24,000 units×$15 per unit)= $360,000

Less cost of goods sold:
Beginning inventory = $0.00
Cost of goods manufactured (25,000 units×$9per unit) = $225,000

Goods available for sale = $225,000
Less ending inventory = $9,000

Cost of goods sold = $216,000

Gross Margin ($360,000 – $216,000) = $144,000

Less selling and administrative expenses:
Variable selling and administrative expenses (24,000 × $1 per unit) = $24,000
Fixed selling and administrative expenses = $10,000

Net operating income ($144,000 – $34,000) = $110,000


Can anyone advise if this is meant to be $9 per unit or $10? Am I on the right track?

Thanks in Advance

Sorry, no. You have used the format of marginal costing for absorption costing. You forgot to include fixed manufacturing overheads.

Please do it again:

Sales
Cost of Sales
Direct Materials
Direct labour
Variable Manufacturing overheads
Fixed Manufacturing overheads
Total cost of goods available for sale
Less: Ending inventory
Gross profit
Operating expenses
Variable selling and admin expenses
Fixed selling and admin expenses
Net Income