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 15,000
Selling price per unit $30
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.
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a. Prepare an income statement using full costing:
Revenue (15,000 units sold * $30 per unit) = $450,000
Direct materials (15,000 units sold * $5 per unit) = $75,000
Direct labor (15,000 units sold * $5 per unit) = $75,000
Variable manufacturing overhead (15,000 units sold * $2 per unit) = $30,000
Variable selling cost (15,000 units sold * $3 per unit) = $45,000
Total variable cost = $225,000
Fixed manufacturing overhead = $160,000
Fixed selling and administrative expense = $80,000
Total fixed cost = $240,000
Total cost (Variable cost + Fixed cost) = $225,000 + $240,000 = $465,000
Gross profit (Revenue - Total cost) = $450,000 - $465,000 = -$15,000
Income statement using full costing:
Revenue: $450,000
Cost of goods sold: $465,000
Gross profit: -$15,000
b. Prepare an income statement using variable costing:
Revenue (15,000 units sold * $30 per unit) = $450,000
Variable cost of goods sold (15,000 units sold * ($5 + $5 + $2 + $3) per unit) = $225,000
Variable selling cost (15,000 units sold * $3 per unit) = $45,000
Contribution margin (Revenue - Variable cost) = $450,000 - $225,000 - $45,000 = $180,000
Fixed manufacturing overhead = $160,000
Fixed selling and administrative expense = $80,000
Total fixed cost = $240,000
Net income (Contribution margin - Total fixed cost) = $180,000 - $240,000 = -$60,000
Income statement using variable costing:
Revenue: $450,000
Variable cost of goods sold: $225,000
Variable selling cost: $45,000
Contribution margin: $180,000
Fixed manufacturing overhead: $160,000
Fixed selling and administrative expense: $80,000
Net income: -$60,000
a. To prepare an income statement using full costing, we need to include all the costs, both fixed and variable, in the calculation.
First, let's calculate the total variable costs per unit:
Direct material per unit + Direct labor per unit + Variable manufacturing overhead per unit = $5 + $5 + $2 = $12
Next, calculate the total fixed manufacturing overhead per unit:
Annual fixed manufacturing overhead / Units produced = $160,000 / 20,000 = $8
Now, let's calculate the total cost per unit using full costing:
Total variable costs per unit + Total fixed manufacturing overhead per unit = $12 + $8 = $20
Using this information, we can prepare the income statement for Vice Versa Ventures:
Income Statement using Full Costing:
Sales Revenue:
(Units sold x Selling price per unit) = 15,000 x $30 = $450,000
Cost of Goods Sold:
(Units sold x Total cost per unit) = 15,000 x $20 = $300,000
Gross Profit:
Sales Revenue - Cost of Goods Sold = $450,000 - $300,000 = $150,000
Operating Expenses:
Fixed selling and administrative expenses = $80,000
Net Income:
Gross Profit - Fixed Selling and Administrative Expenses = $150,000 - $80,000 = $70,000
b. To prepare an income statement using variable costing, we will only consider the variable costs and exclude the fixed manufacturing overhead costs.
Using the information provided, we can calculate the total variable cost per unit as $12.
Income Statement using Variable Costing:
Sales Revenue:
(Units sold x Selling price per unit) = 15,000 x $30 = $450,000
Variable Costs:
(Units sold x Total variable cost per unit) = 15,000 x $12 = $180,000
Contribution Margin:
Sales Revenue - Variable Costs = $450,000 - $180,000 = $270,000
Operating Expenses:
Fixed Selling and Administrative Expenses = $80,000
Net Income:
Contribution Margin - Fixed Selling and Administrative Expenses = $270,000 - $80,000 = $190,000
To prepare an income statement using full costing and variable costing, we need to calculate the relevant costs and allocate the fixed costs appropriately.
a. Prepare an income statement using full costing:
Full costing includes all the costs incurred in the production and selling of units, including fixed costs.
Let's calculate the costs per unit first:
- Direct material per unit: $5
- Direct labor per unit: $5
- Variable manufacturing overhead per unit: $2
- Variable selling cost per unit: $3
Now, let's calculate the total cost per unit:
Total cost per unit = Direct material per unit + Direct labor per unit + Variable manufacturing overhead per unit
Total cost per unit = $5 + $5 + $2 = $12
Next, let's calculate the fixed cost per unit:
Fixed cost per unit = (Annual fixed manufacturing overhead + Annual fixed selling and administrative expense) / Units produced
Fixed cost per unit = ($160,000 + $80,000) / 20,000 = $12
Now, let's prepare the income statement:
Revenue = Units sold * Selling price per unit
Revenue = 15,000 * $30 = $450,000
Total cost of goods sold = Units sold * Total cost per unit
Total cost of goods sold = 15,000 * $12 = $180,000
Gross profit = Revenue - Total cost of goods sold
Gross profit = $450,000 - $180,000 = $270,000
Operating expenses = Total fixed cost per unit * Units sold
Operating expenses = $12 * 15,000 = $180,000
Net income = Gross profit - Operating expenses
Net income = $270,000 - $180,000 = $90,000
b. Prepare an income statement using variable costing:
Variable costing only includes variable costs incurred in the production and selling of units, excluding fixed costs.
Let's calculate the variable cost per unit:
Variable cost per unit = Direct material per unit + Direct labor per unit + Variable manufacturing overhead per unit + Variable selling cost per unit
Variable cost per unit = $5 + $5 + $2 + $3 = $15
Now, let's prepare the income statement:
Revenue = Units sold * Selling price per unit
Revenue = 15,000 * $30 = $450,000
Total variable cost of goods sold = Units sold * Variable cost per unit
Total variable cost of goods sold = 15,000 * $15 = $225,000
Variable gross profit = Revenue - Total variable cost of goods sold
Variable gross profit = $450,000 - $225,000 = $225,000
Variable operating expenses = Units sold * Variable selling cost per unit
Variable operating expenses = 15,000 * $3 = $45,000
Net income = Variable gross profit - Variable operating expenses
Net income = $225,000 - $45,000 = $180,000
Thus, the income statement using full costing shows a net income of $90,000, and the income statement using variable costing shows a net income of $180,000.