Question

Question: Preparing absorption costing income statements, production less than sales

Refer to Exercise E21-19.

Requirements

1. Prepare the May income statement using absorption costing.
2. Is operating income using absorption costing higher or lower than variable costing income? Explain why.
3. Determine the balance in Finished Goods Inventory as of May 31.

Short answer

Answer

1. Operating income is $290,000
2. Lower
3. Finished goods inventory as of May 31 is 0.

Step-by-step solution

Income statement using absorption costing

Particulars	Amount
Variable manufacturing cost	$9
Fixed manufacturing overhead ($91,000/22,000)	$4
Total unit product cost	$13

Particulars	Amount
Net sales revenue ($29x23,000)	$667,000
Less: Cost of goods sold (($13x23,000)	$299,000
Gross profit	$368,000
Less: Selling and administrative cost
Variable selling and administrative cost ($3x23,000)	$69,000
Fixed selling and administrative cost	$9,000
Operating Income	$290,000

Particulars	Amount
Net sales revenue ($29*23,000)	$667,000
Less: Variable costs ($12*23,000)	$276,000
Contribution margin	$391,000
Less: Fixed costs
Fixed costs of goods sold	$91,000
Fixed selling and administrative cost	$9,000
Operating Income	$291,000

comparison between income using absorption and variable costing. 

Operating income using absorption costing is lower than variable costing income because under the absorption method cost of 1,000 beginning inventory is taken as $16,000.

Balance of finished goods inventory as of May 31.

$$\begin{gathered} \mathbf{EndingbalanceinFinishedGoodsInventory}\mathbf{=}\mathbf{Beginningbalance}\mathbf{+}\mathbf{UnitsProduced}\mathbf{-}\mathbf{Unitssold} \\ \mathbf{=}\mathbf{1}\mathbf{,}\mathbf{000}\mathbf{units}\mathbf{+}\mathbf{22}\mathbf{,}\mathbf{000}\mathbf{units}\mathbf{-}\mathbf{23}\mathbf{,}\mathbf{000}\mathbf{units} \\ \mathbf{=}\mathbf{0}\mathbf{units} \end{gathered}$$