BLT produces plastic that is used for injection molding applications such as gears for small motors. In 2012, the first year of operations, BLT produced 6,492 tons of plastic and sold 5,410 tons. In 2013, the production and sales results were exactly reversed. In each year, selling price per ton was $1,300, variable manufacturing costs were 13% of the sales price of units produced, variable selling expenses were 0.08% of the selling price of units sold, fixed manufacturing costs were $2,726,640, and fixed administrative expenses were $502,300.
Prepare comparative income statements for each year using variable costing. (If answer is zero, please enter 0. Do not leave any fields blank.)
Prepare comparative income statements for each year using absorption costing. (If answer is zero, please enter 0. Do not leave any fields blank.)
Reconcile the differences each year in income from operations under the two costing approaches. (If amount is a decrease, use either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)
To prepare the comparative income statements for each year using variable costing and absorption costing, we need to calculate various cost components and determine the net income.
Let's start with the calculation of various cost components:
Variable costing:
1. Variable manufacturing costs: 13% of the sales price of units produced.
Year 2012: Variable manufacturing costs = 13% * (5,410 tons * $1,300/ton)
Year 2013: Variable manufacturing costs = 13% * (6,492 tons * $1,300/ton)
2. Variable selling expenses: 0.08% of the selling price of units sold.
Year 2012: Variable selling expenses = 0.08% * (5,410 tons * $1,300/ton)
Year 2013: Variable selling expenses = 0.08% * (6,492 tons * $1,300/ton)
Absorption costing:
1. Total manufacturing costs: variable manufacturing costs + fixed manufacturing costs.
Year 2012: Total manufacturing costs = Variable manufacturing costs (from above) + fixed manufacturing costs = Variable manufacturing costs + $2,726,640
Year 2013: Total manufacturing costs = Variable manufacturing costs (from above) + fixed manufacturing costs = Variable manufacturing costs + $2,726,640
2. Total expenses: Total manufacturing costs + fixed administrative expenses.
Year 2012: Total expenses = Total manufacturing costs (from above) + $502,300
Year 2013: Total expenses = Total manufacturing costs (from above) + $502,300
Now, let's prepare the comparative income statements for each year using variable costing and absorption costing:
Comparative Income Statement - Variable Costing:
| Year 2012 | Year 2013 |
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Units Produced | 6,492 tons | 5,410 tons |
Units Sold | 5,410 tons | 6,492 tons |
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Sales Revenue | 5,410 tons * $1,300 | 6,492 tons * $1,300 |
Variable Mfg Costs | Calculated above | Calculated above |
Variable Sell Expenses| Calculated above | Calculated above |
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Contribution Margin| Sales Revenue - Variable Mfg Costs - Variable Sell Expenses |
Fixed Manufacturing Costs| $2,726,640 | $2,726,640 |
Fixed Administrative Expenses| $502,300 | $502,300 |
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Income from Operations | Contribution Margin - Fixed Manufacturing Costs - Fixed Administrative Expenses |
Comparative Income Statement - Absorption Costing:
| Year 2012 | Year 2013 |
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Units Produced | 6,492 tons | 5,410 tons |
Units Sold | 5,410 tons | 6,492 tons |
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Sales Revenue | Calculated above | Calculated above |
Total Manufacturing Costs| Calculated above | Calculated above |
Fixed Admin Expenses | $502,300 | $502,300 |
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Gross Profit | Sales Revenue - Total Manufacturing Costs |
Income from Operations| Gross Profit - Fixed Administrative Expenses |
To reconcile the differences each year in income from operations under the two costing approaches, calculate the difference between income from operations under variable costing and absorption costing for each year.
Difference in Income from Operations = Income from Operations (Variable Costing) - Income from Operations (Absorption Costing)