Income Statements under Absorption Costing and VariableCosting

Joplin Industries Inc. manufactures and sells high-qualitysporting goods equipment under its highly recognizable J-Sportslogo. The company began operations on May 1 and operated at 100% ofcapacity (41,800 units) during the first month, creating an endinginventory of 3,800 units. During June, the company produced 38,000garments during the month but sold 41,800 units at $95 per unit.The June manufacturing costs and selling and administrativeexpenses were as follows:

	Number of Units		Unit Cost		Total Cost
Manufacturing costs in June 1 beginning inventory:
Variable	3,800		$38.00		$144,400
Fixed	3,800		14.00		53,200
Total			$52.00		$197,600
Manufacturing costs in June:
Variable	38,000		$38.00		$1,444,000
Fixed	38,000		15.40		585,200
Total			$53.40		$2,029,200
Selling and administrative expenses in June:
Variable	41,800		18.20		$760,760
Fixed	41,800		7.00		292,600
Total			25.20		$1,053,360

a. Prepare an income statement according to theabsorption costing concept for June.

Joplin Industries Inc.
Absorption Costing Income Statement
For the Month Ended June 30
Sales		$
Cost of goods sold:
Beginning inventory	$
Cost of goods manufactured
Total cost of goods sold
Gross profit		$
Selling and administrative expenses
Income from operations		$

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a. Under absorption costing, the cost of goods manufacturedincludes direct materials, direct labor, and factory overheadcosts. Both fixed and variable factory costs are included as partof factory overhead.

Learning Objective 1.

b. Prepare an income statement according to thevariable costing concept for June.

Joplin Industries Inc.
Variable Costing Income Statement
For the Month Ended June 30
Sales		$
Variable cost of goods sold
Manufacturing margin		$
Variable selling and administrative expenses
Contribution margin		$
Fixed costs:
Fixed manufacturing costs	$
Fixed selling and administrative expenses
Total fixed costs
Income from operations		$

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b. Under variable costing, the cost of goods manufacturedincludes only variable manufacturing costs.

b. Under variable costing, the cost of goods manufacturedincludes only variable manufacturing costs.

Learning Objective 1.

c. What is the reason for the difference in theamount of income from operations reported in (a) and (b)?

Under the absorption costing  method, the fixedmanufacturing cost included in the cost of goods sold is matchedwith the revenues. Under variable costing , all of the fixedmanufacturing cost is deducted in the period in which it isincurred, regardless of the amount of inventory change. Thus, wheninventory decreases, the absorption costing  incomestatement will have a lower income from operations.