Question

Sims Company, a manufacturer of tablet computers, began operations on January 1, 2017. Its cost and sales information for this year follows.

Manufacturing costs
Direct materials	\(40 per unit
Direct labor	\)60 per unit
Overhead costs for the year
Variable overhead	\(3,000,000
Fixed overhead	\)7,000,000
Selling and administrative costs for the year
Variable	\(770,000
Fixed	\)4,250,000
Production and sales for the year
Units produced	100,000 units
Units sold	70,000 units
Sales price per unit	$350 per unit

1. Prepare an income statement for the year using variable costing.

2. Prepare an income statement for the year using absorption costing.

3. Under what circumstance(s) is reported income identical under both absorption costing and variable costing?

Short answer

Net income under variable costing is$3,380,000.

Net income under absorption costing is$5,480,000.

Step-by-step solution

Meaning of Income Statement

An income statement is a summary of the expenses paid and revenues earned by a business during a particular period. Expenses generally includemanufacturing and administrative expenses.

Preparation of income statement under variable costing

Sims Company
Costing	Income Statement under Variable
Particulars	Details	Amounts ($)
Sales	(70000*350)	24,500,000
Variable costs:
Direct materials	(70000*40)	2,800,000
Direct labor	(70000*60)	4,200,000
Variable overhead	(3000000/100000)*70000	2,100,000
Variable selling and administrative cost		770,000
Contribution margin		14,861,000
Fixed expenses:
Fixed overhead		7,000,000
Fixed selling and administrative cost		4,250,000
Net income		$3,380,000

Preparation of income statement under absorption costing

Sims Company
Costing	Income Statement under Variable
Particulars	Details	Amounts ($)
Sales	(70000*350)	24,500,000
Cost of goods sold
Direct materials	(70000*40)	2,800,000
Direct labor	(70000*60)	4,200,000
Variable overhead	(3000000/100000)*70000	2,100,000
Fixed overhead cost	(7000000/100000)*70000	4,900,000
Gross profit		10,500,000
Selling and administrative expenses
Fixed		4,250,000
Variable		770,000
Net income		$5,480,000

Identification of circumstance(s)

The reported income will be identical under both variable costing and absorption costing when the production will be equal to the sales. In other words,when the units produced in a particular period are the same as units sold in the same period, net income will be the same in such a scenario.