Exercise 6-3 Income reporting under absorption costing and variable costing LO P2 Sims Company, a manufacturer of tablet computers, began operations on January 1, 2017. Its cost and sales information for this year follows. Manufacturing costs Direct materials $ 40 per unit Direct labor $ 60 per unit Overhead costs for the year Variable overhead $ 3,000,000 Fixed overhead $ 7,000,000 Selling and administrative costs for the year Variable $ 770,000 Fixed $ 4,250,000 Production and sales for the year Units produced 100,000 units Units sold 70,000 units Sales price per unit $ 350 per unit 1. Prepare an income statement for the year using variable costing. 2. Prepare an income statement for the year using absorption costing. 3. Under what circumstance(s) is reported income identical under both absorption costing and variable costing

Answer is given below.

Explanation:

SIMS COMPANY

Variable Costing Income Statement

Forthe Year Ended December31, 2017

Sales 25200000

Less: Variable Costs

Direct Materials 2800000

Direct Labor 4200000

Variable Overhead 2100000

Variable Selling and Administrative 750000

Total Variable Costs 9850000

Contribution Margin 15350000

Less: Fixed Costs

Fixed Overhead 7000000

Fixed Selling and Administrative 4750000

Total Fixed Costs 11750000

Net Operating Income 3600000

Sales = $360 * 70,000

Direct Materials = $40 * 70,000

Direct Labor = $60 * 70,000

Variable Overhead r $3,000,000 * 70,000/100,000

SIMS COMPANY

Absorption Costing Income Statement

Forthe Year Ended December31, 2017

Sales 25200000

Less: Cost of Good Sold

Direct Materials 2800000

Direct Labor 4200000

Variable Overhead 2100000

Fixed Overhead 4900000

Cost of Goods Sold 14000000

Gross Profit 11200000

Less: Selling and Administrative Expense

Variable Selling and Administrative 750000

Fixed Selling and Administrative 4750000

Total Selling and Administrative Expense 5500000

Net Operating Income 5700000

Sales = $360 * 70,000

Direct Materials = $40 * 70,000

Direct Labor= $60 * 70,000

Variable Overhead = $3,000,000 * 70,000 / 100,000

Fixed Overhead = $7,000,000 * 70,000/100,000

Answer 3.

Net Operating Income using Variable Costing and Absorption Costing will be same when units produced and units sold are equal.

answernet income for 2017 will be greater if the inventory quantity declines;