Prepare income statements under absorption and marginal costing and reconcile the difference in profit, given…

Question

Prepare income statements under absorption and marginal costing and reconcile the difference in profit, given the following data...

ScanSolve AI Tutor · Accepted Answer

Here is the solution based on the provided data, assuming the task is to prepare income statements under both absorption and marginal costing, and to reconcile the difference in profit.

Given Data:

Production: 2,200 units
Sales: 2,000 units
Variable manufacturing cost per unit: $\text{N}4$
Fixed manufacturing overhead (total): $\text{N}4,400$
Variable selling and administration overhead per unit: $\text{N}1.50$
Fixed selling and administration overhead: $\text{N}800$
Selling price per unit: $\text{N}30$

Calculate key per-unit costs and total values.
- Fixed manufacturing overhead per unit: $\frac{\text{Fixed manufacturing overhead (total)}}{\text{Production units}} = \frac{\text{N}4,400}{2,200 \text{ units}} = \text{N}2 \text{ per unit}$
- Total Sales Revenue: $2,000 \text{ units} \times \text{N}30/\text{unit} = \text{N}60,000$
- Ending Inventory Units: $\text{Production units} - \text{Sales units} = 2,200 \text{ units} - 2,000 \text{ units} = 200 \text{ units}$
- Total Variable Selling and Administrative Expenses: $2,000 \text{ units} \times \text{N}1.50/\text{unit} = \text{N}3,000$
Prepare Income Statement under Absorption Costing.
Under absorption costing, all manufacturing costs (variable and fixed) are included in the product cost.
- Product Cost per Unit (Absorption): $\text{Variable manufacturing cost per unit} + \text{Fixed manufacturing overhead per unit} = \text{N}4 + \text{N}2 = \text{N}6 \text{ per unit}$
- Cost of Goods Sold (Absorption): $\text{Sales units} \times \text{Product cost per unit (Absorption)} = 2,000 \text{ units} \times \text{N}6/\text{unit} = \text{N}12,000$
$\begin{align*} \textbf{Fortune Ltd.}\\ \textbf{Absorption Costing Income Statement}\\ \text{Sales Revenue} && \text{N}60,000 \\ \text{Less: Cost of Goods Sold} && \text{N}12,000 \\ \text{Gross Profit} && \text{N}48,000 \\ \text{Less: Selling and Administrative Expenses:} \\ \text{Variable Selling and Admin.} && \text{N}3,000 \\ \text{Fixed Selling and Admin.} && \text{N}800 \\ \text{Total Selling and Admin. Expenses} && \text{N}3,800 \\ \textbf{Net Operating Income} && \boxed{\textbf{N}44,200} \end{align*}$
Prepare Income Statement under Marginal Costing.
Under marginal costing, only variable manufacturing costs are included in the product cost. Fixed manufacturing overhead is treated as a period cost.
- Product Cost per Unit (Marginal): $\text{Variable manufacturing cost per unit} = \text{N}4 \text{ per unit}$
- Variable Cost of Goods Sold (Marginal): $\text{Sales units} \times \text{Product cost per unit (Marginal)} = 2,000 \text{ units} \times \text{N}4/\text{unit} = \text{N}8,000$
$\begin{align*} \textbf{Fortune Ltd.}\\ \textbf{Marginal Costing Income Statement}\\ \text{Sales Revenue} && \text{N}60,000 \\ \text{Less: Variable Cost of Goods Sold} && \text{N}8,000 \\ \text{Manufacturing Contribution Margin} && \text{N}52,000 \\ \text{Less: Variable Selling and Administrative Expenses} && \text{N}3,000 \\ \text{Total Contribution Margin} && \text{N}49,000 \\ \text{Less: Fixed Expenses:} \\ \text{Fixed Manufacturing Overhead} && \text{N}4,400 \\ \text{Fixed Selling and Administrative Expenses} && \text{N}800 \\ \text{Total Fixed Expenses} && \text{N}5,200 \\ \textbf{Net Operating Income} && \boxed{\textbf{N}43,800} \end{align*}$
Reconcile the difference in Net Operating Income.
The difference in net operating income between absorption costing and marginal costing is due to the treatment of fixed manufacturing overhead in inventory.
- Net Operating Income (Absorption Costing): $\text{N}44,200$
- Net Operating Income (Marginal Costing): $\text{N}43,800$
- Difference: $\text{N}44,200 - \text{N}43,800 = \text{N}400$
This difference can be reconciled as follows:
$\begin{align*} \text{Change in Inventory Units} &= \text{Production units} - \text{Sales units} \\ &= 2,200 \text{ units} - 2,000 \text{ units} = 200 \text{ units (increase)} \\ \text{Fixed Manufacturing Overhead per Unit} &= \text{N}2 \\ \text{Difference in Profit} &= \text{Change in Inventory Units} \times \text{Fixed Manufacturing Overhead per Unit} \\ &= 200 \text{ units} \times \text{N}2/\text{unit} = \text{N}400 \end{align*}$
Since production was greater than sales, inventory increased, meaning some fixed manufacturing overhead was "stored" in ending inventory under absorption costing, leading to a higher profit compared to marginal costing.
$\begin{align*} \text{Net Operating Income (Marginal Costing)} && \text{N}43,800 \\ \text{Add: Fixed Manufacturing Overhead in Ending Inventory} && \\ (200 \text{ units} \times \text{N}2/\text{unit}) && \text{N}400 \\ \textbf{Net Operating Income (Absorption Costing)} && \boxed{\textbf{N}44,200} \end{align*}$

Prepare income statements under absorption and marginal costing and reconcile the difference in profit, given the following data...

Step-by-step solution

Calculate key per-unit costs and total values.

Prepare Income Statement under Absorption Costing.

Prepare Income Statement under Marginal Costing.

Reconcile the difference in Net Operating Income.

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