Question

E’Lonte Company began operations this year. During this first year, the company produced 300,000 units and sold 250,000 units. Its income statement under absorption costing for this year follows.

Sales (250,000 units x \(18 per unit)		\)4,500,000
Cost of goods sold
Beginning inventory	\(0
Cost of goods manufactured (300,000 units x \)7.50 per unit)	2,250,000
Cost of goods available for sale	2,250,000
Ending inventory (50,000 x \(7.50)	375,000
Cost of goods sold		1,875,000
Gross margin		2,625,000
Selling and administrative expenses		2,200,000
Net income		\)425,000

Additional Information

a. Selling and administrative expenses consist of \(1,200,000 in annual fixed expenses and \)4 per unit in variable selling and administrative expenses.

b. The company’s product cost of \(7.50 per unit is computed as follows.

Direct materials	\)2 per unit
Direct labor	\(2.40 per unit
Variable overhead	\)1.60 per unit
Fixed overhead (\(450,000/300,000 units)	\)1.50 per unit

Required

1. Prepare the company’s income statement under variable costing.

2. Explain any difference between the company’s income under variable costing (from part 1) and the income reported above.

Short answer

Net income of the company is $350,000.

Step-by-step solution

Meaning of Expenses

In accounting, the term expense refers to the amount of money the business entities send to acquire or produce goods or services. Expenses are generally categorized into two categories- prepaid and accrued expenses.

Preparation of income statement

E’Lonte Company
Variable Costing Income Statement
Particulars	Details	Amounts ($)
Sales		$4,500,000
Less: Variable costs:
Direct material	250,000*2	500,000
Direct labor	250,000*2.40	600,000
Variable overhead	250,000*1.60	400,000
Variable selling and administrative expenses	2,200,000-1,200,000	1,000,000
Contribution margin		$2,000,000
Less: Fixed costs:
Fixed selling and administrative expenses		1,200,000
Fixed overhead		450,000
Net income		$350,000

Explanation of difference

In the above scenario, the net income between variable and absorption costing is reflecting different amounts because absorption costing considers thefixed overhead cost deferred in ending inventory.