Question

Oak Mart, a producer of solid oak tables, reports the following data from its second year of business.

Sales price per unit	\(320 per unit	Manufacturing costs this year
Units produced this year	115,000 units	Direct materials	\)40 per unit
Units sold this year	118,000 units	Direct labor	\(62 per unit
Units in beginning-year inventory	3,000 units	Overhead costs this year
Beginning inventory costs		Variable overhead	\)3,220,000
Variable (3,000 units x \(135)	\)405,000	Fixed overhead	\(7,400,000
Fixed (3,000 units x \)80)	240,000	Selling and administrative costs this year
Total	\(645,000	Variable	\)1,416,000
		Fixed	4,600,000

1. Prepare the current-year income statement for the company using variable costing.

2. Prepare the current-year income statement for the company using absorption costing.

3. Explain any difference between the two income numbers under the two costing methods in parts 1 and 2.

Short answer

Net income of the companyunder variable costing is$8,443,000.

Net income of the company under absorption costing is$8,443,000.

Step-by-step solution

Meaning of Income Statement

An income statement is a report that contains the description of revenues and expenses generated and incurred by a business entity during one accounting period. It is prepared annually to ascertain the profit or loss earned or incurred.

Preparation of income statement under variable costing  

Oak Mart
Variable Costing Income Statement
Particulars	Details	Amounts ($)
Sales	(118000*320)	$37,760,000
Less: Variable costs
Beginning inventory	(3000*135)	405,000
Direct materials	(118000*40)	4,720,000
Direct labor	(118000*62)	7,316,000
Variable overhead		3,220,000
Variable selling and administrative expenses		1,416,000
Contribution		$20,683,000
Less: Fixed costs
Beginning inventory	(3000*80)	240,000
Fixed overhead		7,400,000
Fixed selling and administrative expenses		4,600,000
Net income		$8,443,000

Preparation of income statement under absorption costing

Oak Mart
Absorption Costing Income Statement
Particulars	Details	Amounts ($)
Sales	(118000*320)	$37,760,000
Less: Cost of goods sold (Working note)		23,301,000
Gross profit		$14,459,000
Less: Operating expenses
Variable selling and administrative expenses		1,416,000
Fixed selling and administrative expenses		4,600,000
Net income		$8,443,000

Working Note:

Computation of cost of goods sold:

Particulars	Amounts ($)
Beginning inventory
Variable cost	$405,000
Fixed cost	240,000
Manufacturing costs:
Direct materials (118000*40)	4,720,000
Direct labor (118000*62)	7,316,000
Variable overhead	3,220,000
Fixed overhead	7,400,000
Cost of goods sold	$23,301,000

Explanation of difference

As per the data provided above, there is no difference between the net incomes under variable and absorption costing because the number of units sold and produced is identical, including the opening inventory.

The net income varies when there is a discrepancy between the units sold and the units produced