Ex 1

Z COMPANY sells 20,000 units in current years at sales price of $60 per unit Z has the following costs:

Variable Cost per unit Total Fixed Costs

D . Material $8 Overhead $200,000

D . Labor $5 Selling & Administrative $ 150,000

O.H $ 2

Selling $ 1

Required :

Prepare Income statement with Absorption & Variable Costing methods

 Absorption Variable Costs
Costs

Sales 1,200,000 Sales 1,200,000

Product costs Variable costs
D. M 160,000 D. M 160,000

D.L 100,000 D.L 100,000

O.H (V.$ 2×20,000+fix 240,000 O.H 40,000

200,000)
Goods available for 500,000 S&A 20,000 320,000
sale
COGS (500,000) Contribution 880,000
Margin

Gross Margin 700,000 Less: Fixed cost

S& A exp O.H 200,000
Var 20000 S&A 150,000
Fix 150,000 (350,000) (350,000)
Operating income 350,000 Operating 530,000
income

Product Cost

Period Cost
Ex 2
 Z Company has the following sales and cost
data :

Year 1 Year 2
Production In units 40,000 50,000
Sales In units 30,000 30,000
Ending Inventory in units (wgt.Aveg) 10,000 30,000
Sales price per unit $1.00
Unit Variable Cost $0.50
Fixed Manufacturing Costs $4000 $4000
Variable S&A expenses /unit 0.03 $1,000
Fixed S&A expenses $1,000
Required:
Prepare income statements for z Motors under: variable
costing and absorption costing
 Solution:
Absorption Costing Variable Costing
(Required under GAAP/IFRS) (For internal Reporting Only)
Year 1 Year 2 Year 3
Year 1 Year 2 Year 3 Sales 30,000 30,000 30,000
Sales 30,000 30,000 30,000
Beginning 0 5,000 15,000
Beginning 0 6,000 17,500 INV
INV Var. MFG 20,000 25,000 0
Var. MFG 20,000 25,000 0 costs
costs Goods A F S 20,000 30,000 15,000
Fixed MFG 4,000 4,000 4,000 Less: Ending (5,000) (15,000) (0)
Costs Inv
Goods A F S 24,000 35,000 21,500 Variable 15,000 15,000 15,000
Less: (6,000) (17,500) (0) COGS
Ending Inv Var . S&A (900) (900) (900)
Absorption 18,000 17,500 21,500 exps
COGS Contribution 14,100 14,100 14,100
Gross 12,000 12,500 8,500 Margin
Margin Fixed MFG (4,000) (4,000) (4,000)
Var .S&A (900) (900) (900) Costs
Fix ed S&A (1,000) (1,000) (1,000) Fix ed S&A (1,000) (1,000) (1,000)
Operating 10,100 10,600 6,600 Operating 9,100 9,100 9,100
Income Income
Total Operating Income
Absorption Variable Costing
Costing

Year 1 10,100 9,100

Year2 10,600 9,100

Year3 6,600 9,100

Total 27,300 27,300

 Example 3:
Z Motors assembles and sells motor vehicles. Actual data relating to April and
May 2021 are:
Units Data
Apr May
Beginning Inventory 0 ???
Production units 500 400
Sales units 350 520

Variable Costs
Manufacturing cost / unit $ 10,000 $ 10,000
produced
marketing cost / unit sold $ 3,000 $ 3,000
Fixed Costs
Manufacturing costs $ 2,000,000 $ 2,000,000
marketing costs $ 600,000 $ 600,000

The selling price per vehicle is $24,000.

If you know that Company using LIFO Method
Required:
1. Prepare April and May 2021 income statements for z Motors under:
variable costing and absorption costing.

2. Find the difference between operating income for each month under
variable costing and absorption costing.
 Solution
Z Motors
Income Statement - Absorption Costing Method
April May
Sales Revenue 8,400,000 12,480,000
(350 ×$24,000)
Less:
Variable Cost 5,000,000 4,000,000
500×$10,000
Fixed Cost 2,000,000 2,000,000
Manufacturing Cost 7,000,000 6,000,000
Beginning INV. 0 2,100,000
Available for sale 7,000,000 6,100,000
Ending INV. (2,100,000) (420,000)
(150×$14,000)
Cost Of Goods Sold (4,900,000) (7,680,000)

Gross Margin 3,500,000 4,800,000

Marketing Exp.
Variable exp 1,050,000 1,560,000
Fixed exp. 600,000 600,000

Total Marketing Exp. (1,650,000) (2,160,000)

Operating Income 1,850,000 2,640,000

 In Out Balance
Unit Cost/ Cost Unit Cost/ Cost Unit Cost/ Cost
s Unit s Unit s Unit
150 14,000 2,100,00 400 15,000 6,000,00 30 14,000 420,00
0 0 0
400 15,000 6,000,00 120 14,000 1,680,00
0 0
550 8,100,00 520 7,680,00 420,00
0 0 0
 Z Motors
Income Statement – Variable Costing Method
April May
Sales Revenue 8,400,000 12,480,000
(350 ×$24,000)
Less:
Variable Cost 5,000,000 4,000,000
500×$10,000
Manufacturing Cost 5,000,000 4,000,000
Beginning INV. 0 1,500,000
Available for sale 5,000,000 5,500,000
Ending INV. (1,500,000) (300,000)
(150×$14,000)
Cost Of Goods Sold 3,500,000 5,200,000
Variable Marketing 1,050,000 1,560,000
exp
Total Variable cost (4,550,000) (6,760,000)

Contribution Margin 3,850,000 5,720,000

Less: Fixed cost
Fixed 2,000,000 2,000,000
Manufacturing cost
Marketing Exp. 600,000 600,000

Total fixed Exp. (2,600,000) (2,600,000)

Operating Income 1,250,000 3,120,000

 In Out Balance
Unit Cost/ Cost Unit Cost/ Cost Unit Cost/ Cost
s Unit s Unit s Unit
150 10,000 1,500,00 400 10,000 4,000,00 30 10,000 300,00
0 0 0
400 10,000 4,000,00 120 10,000 1,200,00
0 0
550 5,500,00 520 5,200,00 300,00
0 0 0

2- difference between operating income for each month under variable

costing and absorption costing

April May
Absorption Variable Absorption Variable
1,850,000 1,250,000 2,640,000 3,120,000