Free Solved Sims Company, a manufacture of table computer, began operations on january 1, 2019. Its cost and sales information for this year follows.


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It is given in the question that Sims Company, a manufacture of table computer, began operations on january 1, 2019. Its cost and sales information for this year follows.

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Step 1 of 3

According to question, “Sims,” a tablet computer manufacturing company, began its operations on 1 January 2019.

The cost and sales information of company is given and using variable costing and absorption costing income statement is to be prepared.

The income statement for variable costing is one in which the contribution margin is obtained by deducting all variable costs from revenue. The net profit or loss for the period is then calculated by deducting all fixed expenses from this. Finding the percentage of expenses that changes in direct proportion to revenue is helpful.

absorption costing is a technique used to record all costs associated with producing a particular good. Generally accepted accounting principles require absorption costing for external reporting. Absorption costing is used to create the absorption costing income statement. This income statement splits costs into two categories: product costs and period costs.

Explanation:

With the help of given cost and sales information, income statement using variable costing and absorption costing, is to be prepared. The income statement for variable costing is one in which the contribution margin is obtained by deducting all variable costs from revenue whereas the income statement for absorption costing splits costs into two categories: product costs and period costs.

 

Step 2 of 3

1) Income statement for the year using variable costing is to be prepared as –

SIMS
Variable costing income statement
Sales 70000(unit) *360(per unit) $2,520,0000
+ Variable costs:
Direct material 70000(unit)* 35(per unit) $2,450,000
Direct labor 70000(unit)* 55 (per unit) $3,850,000
variable overhead costs 70000* 20 $1,400,000
Variable selling and admini- expenses $750,000
Total variable cost $8450,000 $8,450,000
Contribution margin $16,750,000
– fixed expenses :
fixed selling and administrative costs $5,000,000
fixed overhead costs $8,000,000
Total fixed expenses $13,000,000 $13,000,000
Net operating income and loss $3,750,000

working note –

  • Contribution Margin is calculated by subtracting the total variable cost from sales –

Contribution margin = Sales−Total variable cost

Contribution margin =$2,5,200,000−$8,450,000

Contribution margin =$16,750,000

  • Net operating income is calculated by subtracting the total fixed expenses from contribution margin –

Net operating income and loss =Contribution margin−Total fixed expenses

Net operating income and loss = $16,750,000−$13,000,000

Net operating income and loss= $3,750,000

 

Explanation:

Income statement using variable costing is prepared by subtracting total variable cost from sales and the result would be called contribution margin and total fixed expenses has been subtracted from contribution margin and the result would be either net operating income or loss.

 

Step 3 of 3

2) income statement using absorption costing is to be prepared as –

SIMS
Absorption income statement
Sales 70000(unit) *360(per unit) $2,520,0000
– cost of goods sold :
a) Direct material 70000(unit)* 35(per unit) $2,450,000
b) Direct labor 70000(unit)* 55 (per unit) $3,850,000
c) Variable overhead costs 70000* 20 $1,400,000
d) Fixed overhead cost 70000*80 $5,600,000
Total cost of goods sold $13,300,000 $13,300,000
Gross margin $11,900,000
– selling and administrative expenses :
fixed selling and administrative expenses $5,000,000
variable selling and administrative expenses $750,000
Total operating income or loss $5,750,000 $5,750,000
Net operating income or losses $6,150,000

working Note –

Gross margin is computed by subtracting total cost of goods sold from the sales.

Gross margin =sales−total cost of goods sold

Gross Margin =$25,200,000−13,300,000

Gross Margin =$11,900,000

Selling and administrative expenses included the fixed and variable selling and administrative expenses.

Explanation:

Income statement using absorption costing is prepared by subtracting total cost of goods sold from sales and the result would be called gross margin and total operating expenses has been subtracted from gross margin and the result would be either net operating income or loss.

 

Final solution

1)Using variable costing, income statement has been prepared and the net income is $3,750,000.

2) Using absorption costing, income statement has been prepared and net income is

$6,150,000.

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