The following information relates to Vice Versa Ventures for calendar year 20XX, the company’s first year of operations:
Units produced 20,000
Units sold 17,000
Selling price per unit $35
Direct material per unit $5
Direct labor per unit $5
Variable manufacturing overhead per unit $2
Variable selling cost per unit $3
Annual fixed manufacturing overhead $160,000
Annual fixed selling and administrative expense $80,000
(a) Prepare an income statement using full costing.
(b) Prepare an income statement using variable costing
(a) Income statement using full costing:
Sales revenue:
Units sold * Selling price per unit = 17,000 * $35 = $595,000
Cost of goods sold:
Direct material per unit * Units sold = $5 * 17,000 = $85,000
Direct labor per unit * Units sold = $5 * 17,000 = $85,000
Variable manufacturing overhead per unit * Units sold = $2 * 17,000 = $34,000
Total variable costs:
Direct material cost + Direct labor cost + Variable manufacturing overhead cost = $85,000 + $85,000 + $34,000 = $204,000
Fixed manufacturing overhead:
Annual fixed manufacturing overhead = $160,000
Total manufacturing cost:
Variable costs + Fixed manufacturing overhead = $204,000 + $160,000 = $364,000
Gross profit:
Sales revenue - Cost of goods sold = $595,000 - $364,000 = $231,000
Selling and administrative expense:
Annual fixed selling and administrative expense = $80,000
Net operating income:
Gross profit - Selling and administrative expense = $231,000 - $80,000 = $151,000
(b) Income statement using variable costing:
Sales revenue:
Units sold * Selling price per unit = 17,000 * $35 = $595,000
Variable production cost:
Direct material per unit * Units sold = $5 * 17,000 = $85,000
Direct labor per unit * Units sold = $5 * 17,000 = $85,000
Variable manufacturing overhead per unit * Units sold = $2 * 17,000 = $34,000
Total variable costs:
Variable production cost + Variable manufacturing overhead cost = $85,000 + $85,000 + $34,000 = $204,000
Contribution margin:
Sales revenue - Total variable costs = $595,000 - $204,000 = $391,000
Variable selling and administrative expense:
Variable selling cost per unit * Units sold = $3 * 17,000 = $51,000
Net operating income:
Contribution margin - Variable selling and administrative expense = $391,000 - $51,000 = $340,000
To prepare an income statement using full costing and variable costing, we need to calculate the cost of goods sold (COGS) and allocate the fixed manufacturing overhead.
(a) Income Statement Using Full Costing:
1. Calculate the variable cost per unit:
Variable cost per unit = Direct material per unit + Direct labor per unit + Variable manufacturing overhead per unit
Variable cost per unit = $5 + $5 + $2 = $12
2. Calculate the fixed manufacturing overhead allocated per unit:
Fixed manufacturing overhead allocated per unit = Annual fixed manufacturing overhead / Units produced
Fixed manufacturing overhead allocated per unit = $160,000 / 20,000 = $8
3. Calculate the total cost per unit:
Total cost per unit = Variable cost per unit + Fixed manufacturing overhead allocated per unit
Total cost per unit = $12 + $8 = $20
4. Calculate the cost of goods sold (COGS):
COGS = Total cost per unit * Units sold
COGS = $20 * 17,000 = $340,000
5. Calculate the gross profit:
Gross profit = Revenue - COGS
Gross profit = Selling price per unit * Units sold - COGS
Gross profit = $35 * 17,000 - $340,000
6. Calculate the operating income:
Operating income = Gross profit - Fixed selling and administrative expenses
Operating income = Gross profit - Annual fixed selling and administrative expense
(b) Income Statement Using Variable Costing:
1. Calculate the variable cost per unit (already calculated above):
Variable cost per unit = $12
2. Calculate the total variable cost of goods sold:
Total variable cost of goods sold = Variable cost per unit * Units sold
Total variable cost of goods sold = $12 * 17,000
3. Calculate the gross profit:
Gross profit = Revenue - Total variable cost of goods sold
Gross profit = Selling price per unit * Units sold - Total variable cost of goods sold
4. Calculate the operating income:
Operating income = Gross profit - Fixed selling and administrative expenses
Operating income = Gross profit - Annual fixed selling and administrative expense
Note: The income statement using variable costing excludes fixed manufacturing overhead from the calculation of COGS.
By following the steps above, you will be able to prepare the income statements using both full costing and variable costing methods for Vice Versa Ventures.