Income Statements under Absorption Costing and Variable Costing
Joplin Industries Inc. manufactures and sells high-quality sporting goods equipment under its highly recognizable J-Sports logo. The company began operations on May 1 and operated at 100% of capacity (270,000 units) during the first month, creating an ending inventory of 24,000 units. During June, the company produced 246,000 garments during the month but sold 270,000 units at $300 per unit. The June manufacturing costs and selling and administrative expenses were as follows: Number of
Cost Manufacturing costs in June 1 beginning inventory: Variable 24,000 $150.00 $ 3,600,000 Fixed 24,000 32.80 787,200 Total $182.80 $4,387,200 Manufacturing costs in June: Variable 246,000 $150.00 $36,900,000 Fixed 246,000 36.00 8,856,000 Total $186.00 $45,756,000 Selling and administrative expenses in June: Variable 270,000 $ 45.00 $12,150,000 Fixed 270,000 3.60 972,000 Total $ 48.60 $13,122,000
a. Prepare an income statement according to the absorption costing concept for June. Joplin Industries Inc. Absorption Costing Income Statement For the Month Ended June 30 $ Cost of goods sold: $ $ $
b. Prepare an income statement according to the variable costing concept for June. Joplin Industries Inc. Variable Costing Income Statement For the Month Ended June 30 $ $ $ Fixed costs: $ $
c. What is the reason for the difference in the amount of income from operations reported in (a) and (b)?
Under the method, the fixed manufacturing cost included in the cost of goods sold is matched with the revenues. Under , all of the fixed manufacturing cost is deducted in the period in which it is incurred, regardless of the amount of inventory change. Thus, when inventory decreases, the income statement will have a lower income from operations.