Absorption income statement

Sales revenue (8,500 @ 45each) 382,500

-COGS
DM 10
DL 7
VOH 3.5
FOH (7,500 / 10,000 u) 0.75
Total Product Costs 21.25
(8,500 @21.25) (180,625)
=Gross Margin 201,875
-VSE (10,000)
-Admin Expense (2,000)
=OI 189,875

Variable Income Statement

Sales revenue (8,500 @ 45each) 382,500
Variable Costs of Goods Sold
DM 10
DL 7
VOH 3.5
Total product Costs 20.50
(8,500 @20.25) (174,250)
Variable Selling and Admin
Commisiion 10,000
Admin Exp 1,200 (11,200)
Contribution Margin 197,050
Fixed Overhead (7,500)
Fixed selling and Admin (800)
Operating Income 188,750

Absorption costing
- “absorbs” Fixed Overhead into COGS
- FOH is calculated based on units produced
- Gross margin is used instead of contribution margin
- All selling and admin expenses are placed below the margin line
Variable costing
- Only variable costs are used to calculate the COGS
- All fixed costs are placed below the contribution margin line
- Variable Selling and Admin is placed above the Contribution Margin Line

During 2013, Life Works Inc. has $10,000 in Sales Commission, $2,000 in Administrative Costs of which
$800 is fixed. They sold 8,500 units and produced 10,000 units. Their selling price per unit was $45.
Direct Materials was $10, Direct Labor $7, and variable Overhead was $3.5. Fixed Overhead amounted
to $7,500.

Prepare an Income Statement under Absorption and Variable Costing