Estimated Income Statements, using Absorption and Variable Costing Prior to the first month of operations ending October 31, Marshall Inc. estimated the following operating results: Sales (40,000 x $90) $3,600,000 Manufacturing costs (40,000 units): Direct materials Direct labor Variable factory overhead Fixed factory overhead Fixed selling and administrative expenses Variable selling and administrative expenses The company is evaluating a proposal to manufacture 50,000 units instead of 40,000 units, thus creating an ending inventory of 10,000 units. Manufacturing the additional units will not change sales, unit variable factory overhead costs, total fixed factory overhead cost, or total selling and administrative expenses. a. 1. Prepare an estimated income statement, comparing operating results if 40,000 and 50,000 units are manufactured in the absorption costing format. If an amount box does not require an entry leave it blank. Sales Cost of goods sold: Cost of goods manufactured Inventory, October 31 Total cost of goods sold Gross profit ✓ ✓ ✓ 1,440,000 480,000 240,000 120,000 75,000 200,000 Marshall Inc. Absorption Costing Income Statement For the Month Ending October 31 40,000 Units Manufactured $ ✓ 3,600,000 $ ✓ 2,280,000 2,280,000 $ ✓ 1,320,000 50,000 Units Manufactured $ ✓ 3,600,000 $ √ 2,820,000 564,000 $ ✓ 2,256,000 $ ✓ 1,344,000
Estimated Income Statements, using Absorption and Variable Costing Prior to the first month of operations ending October 31, Marshall Inc. estimated the following operating results: Sales (40,000 x $90) $3,600,000 Manufacturing costs (40,000 units): Direct materials Direct labor Variable factory overhead Fixed factory overhead Fixed selling and administrative expenses Variable selling and administrative expenses The company is evaluating a proposal to manufacture 50,000 units instead of 40,000 units, thus creating an ending inventory of 10,000 units. Manufacturing the additional units will not change sales, unit variable factory overhead costs, total fixed factory overhead cost, or total selling and administrative expenses. a. 1. Prepare an estimated income statement, comparing operating results if 40,000 and 50,000 units are manufactured in the absorption costing format. If an amount box does not require an entry leave it blank. Sales Cost of goods sold: Cost of goods manufactured Inventory, October 31 Total cost of goods sold Gross profit ✓ ✓ ✓ 1,440,000 480,000 240,000 120,000 75,000 200,000 Marshall Inc. Absorption Costing Income Statement For the Month Ending October 31 40,000 Units Manufactured $ ✓ 3,600,000 $ ✓ 2,280,000 2,280,000 $ ✓ 1,320,000 50,000 Units Manufactured $ ✓ 3,600,000 $ √ 2,820,000 564,000 $ ✓ 2,256,000 $ ✓ 1,344,000
Chapter1: Financial Statements And Business Decisions
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Transcribed Image Text:### Estimated Income Statements Using Absorption and Variable Costing
**Context:**
Prior to the first month of operations ending October 31, Marshall Inc. estimated the following operating results for manufacturing 40,000 units:
- **Sales (40,000 units at $90 each):** $3,600,000
- **Manufacturing Costs (40,000 units):**
- Direct materials: $1,440,000
- Direct labor: $480,000
- Variable factory overhead: $240,000
- Fixed factory overhead: $120,000
- **Fixed Selling and Administrative Expenses:** $75,000
- **Variable Selling and Administrative Expenses:** $200,000
The proposal is to manufacture 50,000 units instead of 40,000, creating an inventory of 10,000 units. This change will not affect sales, unit variable factory overhead costs, or fixed costs.
#### Instruction:
Prepare an estimated income statement to compare operating results under absorption costing for manufacturing 40,000 and 50,000 units.
---
### Marshall Inc.
**Absorption Costing Income Statement for the Month Ending October 31**
| **Description** | **40,000 Units Manufactured** | **50,000 Units Manufactured** |
|-------------------------------|-------------------------------|-------------------------------|
| **Sales** | $3,600,000 | $3,600,000 |
| **Cost of Goods Sold:** | | |
| - Cost of goods manufactured | $2,280,000 | $2,820,000 |
| - Inventory, October 31 | 0 | 564,000 |
| **Total Cost of Goods Sold** | $2,280,000 | $2,256,000 |
| **Gross Profit** | $1,320,000 | $1,344,000 |
**Explanation:**
The table above illustrates the differences in cost and gross profit when comparing the manufacture of 40,000 units to 50,000 units. Key observations include:
- **Gross Profit Comparison:** The gross profit increases from $1,320,000 to $1,344,000 when additional inventory is created.
- **Inventory Impact:** There is an ending inventory value of $564,000 when manufacturing 50,000 units. This inventory reduces the total cost of goods sold, thus increasing
Transcribed Image Text:### Analysis of Costing and Operating Income
#### Fixed Costs:
- **Fixed factory overhead**:
- Amount: $120,000
- Status: Verified (✓)
- **Variable cost of goods sold**:
- Amount: $75,000
- Status: Unverified (✖)
- **Total fixed costs**:
- Total Amount: $195,000
- Status: Verified (✓)
#### Operating Income:
- **Operating income**:
- Amount: $1,045,000
- Status: Verified (✓)
#### Observations:
- **Variable Cost of Goods Sold**: There is a discrepancy noted here, indicated by the unverified status (✖).
#### Explanation:
**b. Reason for Difference in Operating Income:**
The increase in operating income under absorption costing is due to:
- **Allocation of fixed factory overhead** over a **larger** (✓) number of units. This results in a **lower** (✓) cost of goods sold.
- The variations can also be linked to the fixed factory overhead cost included in the **ending** (✓) inventory.
This information is crucial for understanding why different levels of production can lead to variations in reported operating income under absorption costing.
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Absorption costing treat fixed manufacturing cost as product cost but variable costing includes only variable cost as product cost.
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