1.
1.Prepare an income statement based on the absorption costing concept.
2. Prepare an income statement based on the variable costing concept.
Describe how ?
Solution
I am giving an example from a source mentioned:
http://www.accountingformanagement.org/exercise-2-vaac/
Suppose income and cost data is given
AGA company manufactures and sells a product for $20/Kg. The data for the last year is given
below:
Let us prepare Absorbtion costing
(a) Absorption costing:
80,000Kg
Analysis of absorption costing
(b)Variable costing:
There is differnce in net income of variable cost and absorbtion costing due to change in
treatment of fixed overheads. In absorbtion costing fixed over heads are prorated over the
quantity of goods sold, where as variable costing fixed costs are seperate and taken as whole for
the entire period
Thus if production quantity is greater than sold quantity, net profit will be more in absorbtion
costing campared to variable costing
Sales 75,000 Kg

2.
Finished goods inventory at the beginning of the
period
12,000 Kg
Finished goods inventory at the closing of the period 17,000 Kg
Manufacturing costs:
Variable cost $8 per Kg
Fixed manufacturing overhead cost
$320,000 per
year
Marketing and administrative expenses:
Variable expenses $2 per Kg of sale
Fixed expenses
$300,000 per
year