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Income Statements under Absorption Costing and Variable Costing

Crazy Mountain Sports Inc. assembles and sells snowmobile engines. The company began operations on March 1 and operated at 100% of capacity during the first month. The following data summarize the results for March:

Line Item Description Amount Amount
Sales (14,000 units) $1,680,000
Production costs (18,000 units):
Direct materials $799,200
Direct labor 383,400
Variable factory overhead 192,600
Fixed factory overhead 127,800 1,503,000
Selling and administrative expenses:
Variable selling and administrative expenses $233,000
Fixed selling and administrative expenses 90,200 323,200

If required, round interim per-unit calculations to the nearest cent.

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a. Prepare an income statement according to the absorption costing concept.

Crazy Mountain Sports Inc.
Absorption Costing Income Statement
For the Month Ended March 31
Line Item Description Amount

Sales
$Sales
1,680,000

Cost of goods sold
Cost of goods sold

Gross profit
$Gross profit

Selling and administrative expenses
Selling and administrative expenses
323,200

Operating income
$Operating income
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a. Under absorption costing, the cost of goods manufactured includes direct materials, direct labor, and factory overhead costs. Both fixed and variable factory costs are included as part of factory overhead.

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b. Prepare an income statement according to the variable costing concept.

Crazy Mountain Sports Inc.
Variable Costing Income Statement
For the Month Ended March 31
Line Item Description Amount Amount

Sales
$Sales

Variable cost of goods sold
Variable cost of goods sold

Manufacturing margin
$Manufacturing margin

Variable selling and administrative expenses
Variable selling and administrative expenses
233,000

Contribution margin
$Contribution margin
Fixed costs:

Fixed factory overhead costs
$Fixed factory overhead costs
127,800

Fixed selling and administrative expenses
Fixed selling and administrative expenses
90,200

Total fixed costs
Total fixed costs
218,000

Operating income
$Operating income

Answer 1

To prepare the income statements under both absorption costing and variable costing for Crazy Mountain Sports Inc., we need to calculate various components based on the provided data.

### a. Absorption Costing Income Statement

**Absorption Costing Income Statement**
For the Month Ended March 31

1. **Sales**:
\( \text{Sales} = 14,000 \text{ units} \times \frac{1,680,000}{14,000} = 1,680,000 \)

2. **Cost of Goods Sold (COGS)**:
- Calculate the total production costs:
- Direct Materials: $799,200
- Direct Labor: $383,400
- Variable Factory Overhead: $192,600
- Fixed Factory Overhead: $127,800
- **Total Production Costs** = $799,200 + $383,400 + $192,600 + $127,800 = $1,503,000

- COGS = (Total Production Costs / Total Production Units) × Units Sold
= \( \frac{1,503,000}{18,000} \times 14,000 = 1,167,000 \)

3. **Gross Profit**:
\( \text{Gross Profit} = \text{Sales} - \text{COGS} \)
= \( 1,680,000 - 1,167,000 = 513,000 \)

4. **Selling and Administrative Expenses**:
Total Selling and Administrative Expenses = $323,200 (given)

5. **Operating Income**:
\( \text{Operating Income} = \text{Gross Profit} - \text{Selling and Administrative Expenses} \)
= \( 513,000 - 323,200 = 189,800 \)

Putting it all together:

```
Crazy Mountain Sports Inc.
Absorption Costing Income Statement
For the Month Ended March 31

Sales: $1,680,000
Cost of Goods Sold: (1,167,000)
Gross Profit: 513,000
Selling and Administrative Expenses: (323,200)
Operating Income: $189,800
```

---

### b. Variable Costing Income Statement

**Variable Costing Income Statement**
For the Month Ended March 31

1. **Sales**:
\( \text{Sales} = 1,680,000 \)

2. **Variable Cost of Goods Sold**:
- Calculate variable manufacturing costs (which includes only direct materials, direct labor, and variable factory overhead):
- Variable COGS = Direct Materials + Direct Labor + Variable Factory Overhead
= \( 799,200 + 383,400 + 192,600 = 1,375,200 \)

- COGS per unit = \( \frac{1,375,200}{18,000} \)
= 76.40

- COGS for units sold = \( 76.40 \times 14,000 = 1,070,800 \)

3. **Manufacturing Margin**:
\( \text{Manufacturing Margin} = \text{Sales} - \text{Variable COGS} \)
= \( 1,680,000 - 1,070,800 = 609,200 \)

4. **Variable Selling and Administrative Expenses**:
Total Variable Selling and Administrative Expenses = $233,000 (given)

5. **Contribution Margin**:
\( \text{Contribution Margin} = \text{Manufacturing Margin} - \text{Variable Selling and Administrative Expenses} \)
= \( 609,200 - 233,000 = 376,200 \)

6. **Fixed Costs**:
- Fixed Factory Overhead Costs: $127,800
- Fixed Selling and Administrative Expenses: $90,200
- **Total Fixed Costs** = \( 127,800 + 90,200 = 218,000 \)

7. **Operating Income**:
\( \text{Operating Income} = \text{Contribution Margin} - \text{Total Fixed Costs} \)
= \( 376,200 - 218,000 = 158,200 \)

Putting it all together:

```
Crazy Mountain Sports Inc.
Variable Costing Income Statement
For the Month Ended March 31

Sales: $1,680,000
Variable Cost of Goods Sold: (1,070,800)
Manufacturing Margin: 609,200
Variable Selling and Administrative Expenses: (233,000)
Contribution Margin: $376,200
Fixed Costs:
Fixed Factory Overhead Costs: (127,800)
Fixed Selling and Administrative Expenses: (90,200)
Total Fixed Costs: (218,000)
Operating Income: $158,200
```

These income statements reflect the company’s performance under both costing methods for the month of March.