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Sims Company, a manufacturer of tablet computers, began operations on January 1, 2019. Its cost and sales information for this year follows. Manufacturing costs Direct materials $ 35 per unit Direct labor $ 55 per unit Overhead costs Variable $ 40 per unit Fixed $ 6,300,000 (per year) Selling and administrative costs for the year Variable $ 700,000 Fixed $ 4,250,000 Production and sales for the year Units produced 105,000 units Units sold 75,000 units Sales price per unit $ 360 per unit 1. Prepare an income statement for the year using variable costing. 2. Prepare an income statement for the year using absorption costing.

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Answer:

Instructions are below.

Explanation:

Giving the following information:

Manufacturing costs:

Direct materials= $35 per unit

Direct labor= $55 per unit

Overhead costs

Variable= $40 per unit

Fixed= $6,300,000

Selling and administrative costs for the year:

Variable $700,000

Fixed $4,250,000

Units produced= 105,000

Units sold= 75,000 units

Sales price per unit $ 360 per unit

The difference between the absorption costing and variable costing method is that the first one includes the fixed overhead in the product cost.

1) Variable costing:

Unitary variable cost= direct material + direct labor + variable overhead

Unitary variable cost= 35 + 55 + 40= 130

Sales= 75,000*360= 27,000,000

Variable costs= (75,000*130)+700,000= (10,450,000)

Contribution margin= 16,550,000

Fixed overhead= (6,300,000)

Fixed Selling and administrative costs= (4,250,000)

Net operating income= 4,250,000

2) Absorption costing:

Unitary product cost= direct material + direct labor + total unitary overhead

Unitary fixed overhead= 6,300,000/105,000= 60

Unitary product cost= 130 + 60= 190

Sales= 75,000*360= 27,000,000

Cost of goods sold= (75,000*190)= (14,250,000)

Gross profit= 12,750,000

Total Selling and administrative costs= (4,950,000)

Net operating income= 7,800,000

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