Question

Hayek Bikes prepares the income statement under variable costing for its managerial reports, and it prepares the income statement under absorption costing for external reporting. For its first month of operations, 375 bikes were produced and 225 were sold; this left 150 bikes in ending inventory. The income statement information under variable costing follows.

Sales (225 × \(1,600)	\)360,000
Variable product cost (225 × \(625)	140,625
Variable selling and administrative expenses (225 × \)65)	14,625
Contribution margin	204,750
Fixed overhead cost	56,250
Fixed selling and administrative expense	75,000
Net income	$73,500

1. Prepare this company’s income statement for its first month of operations under absorption costing.

2. Explain the difference in income between the variable costing and absorption costing income statements.

Short answer

Net income of the company is$96,000.

Step-by-step solution

Meaning of Inventory  

The term inventory refers to the goods or products stocked by a business entity with an intent to resell them and generate revenues for running the business activities.

Preparation of income statement

Hayek Bikes
Absorption Costing Income Statement
Particulars	Details	Amounts ($)
Sales	(225*1600)	$360,000
Less: Cost of goods sold
Variable product cost	(225*65)	140,625
Fixed overhead cost	(56250/375*225)	33,750
Gross profit		$185,625
Less: Selling and administrative expenses
Fixed		75,000
Variable		14,625
Net income		$96,000

Difference in income between the variable costing and absorption costing

The major difference in the income between the variable costing and absorption costing is that absorption costing includes all fixed overhead costsincurred by the business in producing a product. On the other hand, the variable costing systemexcludes fixed direct overheads from the cost of goods sold.