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Jackson Company produces plastic that is used for injection molding applications such as gears...

Question:

Jackson Company produces plastic that is used for injection molding applications such as gears for small motors. In 2016, the first year of operations, Jackson produced 3,500 tons of plastic and sold 3,150 tons. In 2017, the production and sales results were exactly reversed. In each year, the selling price per ton was $2,200, variable manufacturing costs were 18% of the sales price of units produced, variable selling expenses were 9% of the selling price of units sold, fixed manufacturing costs were $2,555,000, and fixed administrative expenses were $590,000.

Required:

1. Prepare income statements for each year using variable costing.

2. Prepare income statements for each year using absorption costing.

3. Reconcile the differences in net income for each year under the two costing approaches.

Manufacturing Cost:

Manufacturing cost include direct materials, direct labor, variable manufacturing overhead and fixed manufacturing overhead. In case of variable costing, the entire amount of fixed manufacturing overhead is considered as expense at the time products are manufactured.

Answer and Explanation:

1) The income statements for each year using variable costing is as follows:

2016

Sales (3,150*2,200) 6,930,000
Variable Manufacturing Cost (3,150*2,200*18%) -1,247,400
Variable Selling Expenses (3,150*2,200*9%) -623,700
Contribution Margin 5,058,900
Fixed Manufacturing Cost -2,555,000
Fixed Administrative Expense -590,000
Net Income 1,913,900


2017

Sales (3,500*2,200) 7,700,000
Variable Manufacturing Cost (3,500*2,200*18%) -1,247,400
Variable Selling Expenses (3,500*2,200*9%) -693,000
Contribution Margin 5,621,000
Fixed Manufacturing Cost -2,555,000
Fixed Administrative Expense -590,000
Net Income 2,476,000


2) The income statements for each year using absorption costing is as follows:2016

Sales (3,150*2,200) 6,930,000
Variable Manufacturing Cost (3,150*2,200*18%) 1,247,400
Fixed Manufacturing Cost (2,555,000/3,5008*3,150) -2,299,500
Gross Margin 4,628,853
Variable Selling Expenses (3,150*2,200*9%) -623,700
Fixed Administrative Expense -590,000
Net Income 2,169,400


2017

Sales (3,500*2,200) 7,700,000
Fixed Manufacturing Cost (2,555,000/3,15083,500) -2,838,888.89
Variable Manufacturing Cost (3,500*2,200*18%) -1,386,000
Contribution Margin 3,475,111.11
Variable Selling Expenses (3,500*2,200*9%) -693,000
Fixed Administrative Expense -590,000
Net Income 2,192,111.11


3. Reconcile the differences in net income for each year under the two costing approache

2016

Units Produced 3,500
Units Sold 3,150
Ending Inventory 350
Fixed Manufacturing Overhead per Unit (2,555,000/3,500) 730
Value of Ending Inventory 255,500


Net Income-Variable 1,913,900
Net Income-Absorption 2,169,400
Difference 255,500


2017

Units Produced 3,150
Units Sold 3,500
Beginning Inventory 350
Fixed Manufacturing Overhead per Unit (2,555,000/3,150) 811.11
Value of Ending Inventory 283,888.89


Net Income-Variable 2,476,000
Net Income-Absorption 2,192,111.11
Difference 283,888.89

Learn more about this topic:

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Variable Costing: Method, Formula & Advantages

from Financial Accounting: Help and Review

Chapter 13 / Lesson 5
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